International Monetary Systems Topic: International Trade and Trade Restrictions

Contact Information Dr. Dave McEvoy Associate Professor of Economics Appalachian State University, NC 28608 Email: mcevoydm@appstate.edu Course Website: davemcevoy.weebly.com/imsangers2018.html

Administrative things Groups: make sure to update the Google sheet with your choice of country

If these countries were to trade, which would export Radios?

Today’s Agenda Gains from trade from a market perspective Arguments for and against free trade Tariffs (a type of trade restriction) Balance of Payments Accounts (measuring trade balances)

United States Trade Balance

France Trade Balance

Consider a country Isoland and the domestic market for textiles

Domestic Market Equilibrium (no trade) Price of textiles Quantity of textiles

Introducing trade Isoland is just one small country in the big bad world The same textiles are also produced in other countries The textile markets prevailing in other countries we will call the “world market” The world supply and demand determine the “world price” – the price is in Isoland dollars A comparison of the domestic price with the world price will indicate whether Isoland will import or export textiles.

Isoland and World Textile Markets P P Q Q Isoland’s Textile Market World Textile Market

Welfare measures after trade Which actors in the Isoland market are better off? Which are worse off? What about total welfare (surplus)?

Isoland and World Textile Markets (low world price) Q Q Isoland’s Textile Market World Textile Market

Welfare measures after trade (low world price) Which actors in the Isoland market are better off? Which are worse off? What about total welfare (surplus)?

Trade Restrictions - Tariffs When countries become importers of goods we know that consumers are better off but producers are worse off. Sometimes governments are willing (or are lobbied) to protect domestic producers by imposing tariffs – a tax on imported goods (e.g., part of the U.S. argument for tariffs on metals) The tariff raises the price of the good relative to world price (which is also the domestic price without trade restrictions)

Welfare measures with tariffs (tax on imports)

Types of government policies that can affect trade Tariffs Quotas Others?

Arguments for and against free trade Could increase total economic welfare

25% tariff on imported steel 10% tariff on imported aluminum

Group Work: Trade and trade restrictions Ecoland is a small country that produces and consumes jelly beans. The world price of jelly beans (outside of Ecoland) is €1 per bag. Ecoland’s domestic demand and supply functions for jelly beans are: QD = 8 – P QS = P where P and Q are prices in euros and quantity in bags.

QD = 8 – P QS = P PW = €1 per bag Answer the following (make sure to draw graphs!) No trade: Calculate the equilibrium price (the domestic price), quantity, consumer surplus, producer surplus and total surplus. Free Trade: Calculate the equilibrium price (the domestic price) quantity produced domestically, quantity consumed domestically, imports, consumer surplus, producer surplus and total surplus Trade with Tariff: Suppose a €1 tariff is imposed for all inputs. Calculate equilibrium price (domestic price), quantity produced domestically, quantity consumed domestically, imports, consumer surplus, producer surplus, government revenue and total surplus. Summary: What are the gains from free trade in Euros? What is the deadweight loss from the trade restriction?