Chapter 9 International Trade

The Determinants of Trade Without international trade, domestic supply & domestic demand meet at an equil. price. World price = price of a good that prevails in world market If world price < domestic price, you import; if world price > domestic price, you export - Both based on comparative advantage

Winners and Losers from Trade Assumption: the country is small compared to world (price takers) Example of an Exporting Country

Gains & Losses from Trade Exporting country: Domestic producers are better off and domestic consumers are worse off Trade raises economic well-being of a nation; rise in total surplus

Gains & Losses of an Importing Country World price below domestic price leads to imports

Winners & Losers Importing Country: When importing, domestic consumers are better off, and domestic producers are worse off Trade raises economic well-being of a nation with increased total surplus Trade policies expands size of economic pie, but also creates winners & losers

The Effects of a Tariff Tariff - tax on imports Tariff raises price of imports above the world price (by size of tariff) and pushes it closer to price that would prevail without trade

Effects of a Tariff By raising price, it reduces the quantity of imports and moves the market closer to equilibrium without trade Domestic sellers are better off, domestic buyers are worse off Total surplus has fallen, creating DWL (because a tariff is a tax)

Effects of an Import Quota Limit on the quantity of a good that can be produced abroad and sold domestically Shifts supply curve to right by size of quota Leads to exact same result as a tariff except instead of having gov’t revenue, license holders get the surplus

Other Benefits of Int’l Trade Increased variety of goods Lower costs through economies of scale Increased competition Enhanced flow of ideas

Arguments for Restricting Trade Jobs Argument: Trade may eliminate some jobs in industries that you don’t have comparative advantage in, however, you should gain same # of jobs in other industry National Security Argument: Does it make you too reliant on other countries for industries vital to defend your country?

Arguments for Restricting Trade Infant-Industry Argument: Do new industries need protection? Difficult for gov’t to pick winners Unfair Competition Argument: Free trade is only ok if everyone plays by same rules Bargaining Chip Argument: Can use restrictions as threat to get other countries to remove barriers – what if they call our bluff?

Trade Agreements Unilateral agreement: remove trade restrictions on its own Multilateral agreement: reduce its trade restrictions while other countries do the same (NAFTA, GATT)