Trade Barriers Economics Mr. Hellums

What stands in the way of trade? What increases the transaction costs: the distance, the terrain, the costs associated with operating the market, the nature of the good and red tape. The idea here is to illustrate that what stands in the way of trade are distance, terrain, currency and nature of the good (icecream melts so until you discover the freezer, all ice-cream is produced locally) and paperwork. They all raise transaction costs. That is why historically, the only traded goods were luxuries because the necessities were too costly to transport. But transaction costs can be reduced through technology, through human action reducing paperwork, through monetary union.

Travel Time from New York City: 1800 Maps adapted from Charles O. Paullin, Atlas of Historical Geography, Carnegie Foundation, 1932

Travel Time from New York City: 1857

Travel Time from New York City: 1930 (by Rail)

European Monetary Union An institutional change that helps information and goods flow faster and at lower cost.

What else restricts trade?

Government Trade Policies Protectionism- policies that protect domestic industries from foreign competition How? Quotas: Limited number of imported Goods Tariffs: Tax that raises the Price of imported goods

Why Do Some People Want Trade Restrictions? If Everyone Gains, What’s the Problem? All Consumers Gain - Goods Are Cheaper Some Producers Lose - They Don’t Have a Comparative Advantage People are Consumers and Also Workers for Producers If you work for Ford, do you want higher tariffs on Japanese cars?

Candlemaker’s Petition – Outlaw sunlight “Sun is an unfair competition” Protect the candlemakers! More jobs making candles/lights Why is it ridiculous? Light was for free, now it costs Resources are used up Overall, the result is we are poorer For candlemakers’ petition, see http://bastiat.org/en/petition.html

Voluntary Trade Makes Participants Better Off… and Creates Wealth Bottom Line Voluntary Trade Makes Participants Better Off… and Creates Wealth