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