INTERNATIONAL TRADE 35 C H A P T E R

SUPPLY AND DEMAND ANALYSIS OF EXPORTS AND IMPORTS The amount of a good or service a nation will export or import depends on differences between the equilibrium world price and the equilibrium domestic price World price- the price that equates the quantities supplied and demanded globally. Domestic price- price that would prevail in a closed economy (an economy that does not trade) An example…….

SUPPLY AND DEMAND IN THE UNITED STATES U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand DdDd SdSd If the world price exceeds the U.S. price by 25 cents... $ Price (per pound; U.S. dollars) Quantity of Aluminum Price (per pound; U.S. dollars) $ Quantity of Aluminum Assuming a closed economy Assuming an open economy

EXPORTS = 50 U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $ DdDd Price (per pound; U.S. dollars) SURPLUS = 50 $ If the world price goes further up... SdSd Quantity of Aluminum SUPPLY AND DEMAND IN THE UNITED STATES

EXPORTS = 50 EXPORTS = 100 U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $ DdDd Price (per pound; U.S. dollars) SURPLUS = 50 SURPLUS = 100 $ If world prices fall below $ SdSd U.S. export supply Quantity of Aluminum SUPPLY AND DEMAND IN THE UNITED STATES

SHORTAGE = 50 U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $ DdDd Price (per pound; U.S. dollars) SURPLUS = 50 SURPLUS = 100 $ SdSd EXPORTS = 50 EXPORTS = 100 IMPORTS = 50 U.S. export supply Quantity of Aluminum SUPPLY AND DEMAND IN THE UNITED STATES

SHORTAGE = 50 SHORTAGE = 100 U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $ DdDd Price (per pound; U.S. dollars) SURPLUS = 50 SURPLUS = 100 U.S. export supply EXPORTS = 50 EXPORTS = 100 IMPORTS = 50 IMPORTS = 100 U.S. import demand $ SdSd Quantity of Aluminum SUPPLY AND DEMAND IN THE UNITED STATES

Canada’s Domestic Aluminum Market Canada’s Export Supply And Import Demand DdDd SHORTAGE = 50 $ Price (per pound; U.S. dollars) SURPLUS = 100 Canadian export supply Canadian import demand $ SdSd SURPLUS = 50 Quantity of Aluminum SUPPLY AND DEMAND IN CANADA

EQUILIBRIUM WORLD PRICE AND QUANTITY OF EXPORTS & IMPORTS Price (per pound; U.S. dollars) U.S. export supply U.S. import demand Quantity of Aluminum Canadian export supply Canadian import demand $ Equilibrium

TRADE BARRIERS (that we have not covered) Nontariff Barrier (NTB)- licensing requirement that specifies unreasonable standards pertaining to product quality and safety or other bureaucratic red tape that restricts quotas. Voluntary Export Restriction (VER)- trade barrier by which foreign firms “volunatrily’ lmit their exports to a particular country. Mercantilism- nationalized development of an industry to attain a favorable trade balance.

ECONOMIC IMPACT OF TARIFFS Direct Effects: Decline in Consumption Increased Domestic Production Decline in Imports Tariff Revenue

THE CASE FOR PROTECTION Military Self-Sufficiency Increase Domestic Employment Job Creation From Imports Possibility of Retaliation Infant-Industry Argument Strategic Trade Policy Protection-Against-Dumping