Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. International Trade What determines whether a country imports or exports a good?

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. International Trade Who gains and who loses from free trade among countries?

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. International Trade What are the arguments that people use to advocate trade restrictions?

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Equilibrium Without Trade... Price of Steel Equilibrium Price 0Quantity of Steel Equilibrium quantity Domestic supply Domestic demand Producer surplus Consumer surplus

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. World Price and Comparative Advantage n If a country has a comparative advantage, then the domestic price will be below the world price, and the country will be an exporter of the good. n If the country does not have a comparative advantage, then the domestic price will be higher than the world price, and the country will be an importer of the good.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. World Price and Comparative Advantage If the country does not have a comparative advantage, then the domestic price will be higher than the world price, and the country will be an importer of the good.

Price of Steel 0Quantity of Steel Domestic demand International Trade in an Exporting Country... Domestic supply World price Price after trade Exports Domestic quantity demanded Domestic quantity supplied Price before trade Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Price of Steel 0Quantity of Steel World price Domestic demand How Free Trade Affects Welfare in an Exporting Country... Domestic supply Price after trade Price before trade A Consumer surplus before trade B C Producer surplus before trade

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price of Steel 0Quantity of Steel World price Domestic demand How Free Trade Affects Welfare in an Exporting Country... Domestic supply Price after trade Price before trade A Consumer surplus after trade C B Producer surplus after trade D Exports

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Changes in Welfare from Free Trade: The Case of an Exporting Country The area D shows the increase in total surplus and represents the gains from trade. Before TradeAfter TradeChange Consumer SurplusA + BA- B Producer SurplusCB + C + D+ (B + D) Total SurplusA + B + CA + B + C + D+ D

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How Free Trade Affects Welfare in an Exporting Country n Domestic producers of the good are better off n Domestic consumers of the good are worse off. u Trade raises the economic well- being of the nation as a whole.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. International Trade and the Importing Country... Price of Steel 0Quantity of Steel Domestic supply Domestic demand World Price Price after trade Domestic quantity demanded Domestic quantity supplied Price before trade Imports

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How Free Trade Affects Welfare in an Importing Country... Price of Steel 0Quantity of Steel Domestic supply World Price Domestic demand Price after trade Price before trade A Consumer surplus before trade C B Producer surplus before trade

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How Free Trade Affects Welfare in an Importing Country... Price of Steel 0Quantity of Steel Domestic supply World Price Domestic demand Price after trade Price before trade A Consumer surplus after trade B D C Producer surplus after trade Imports

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Changes in Welfare from Free Trade: The Case of an Importing Country The area D shows the increase in total surplus and represents the gains from trade. Before TradeAfter TradeChange Consumer SurplusAA + B + D+ (B + D) Producer SurplusB + C C- B Total SurplusA + B + CA + B + C + D+ D

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How Free Trade Affects Welfare in an Importing Country n Domestic producers of the good are worse off n Domestic consumers of the good are better off. u Trade raises the economic well-being of the nation as a whole uthe gains of consumers exceed the losses of producers.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Gains and Losses from Free International Trade u The gains of the winners exceed the losses of the losers. u The net change in total surplus is positive.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Tariffs u Tariffs are taxes on imported goods. u Tariffs raise the price of imported goods above the world price by the amount of the tariff.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand World price Q1SQ1S Q1DQ1D Price without tariff Imports without tariff Consumer surplus before tariff Producer surplus before tariff

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Price without tariff Price with tariff Imports without tariff Imports with tariff A Consumer surplus with tariff B

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Imports without tariff Imports with tariff C G Producer surplus before tariff = G Producer surplus after tariff = G+C

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Imports without tariff Imports with tariff E Tariff revenue Price with tariff Price without tariff

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Price without tariff Price with tariff Imports without tariff Imports with tariff A B CE G DF Deadweight loss

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Changes in Welfare from a Tariff Before TariffAfter TariffChange Consumer Surplus A+B+C+D+E+FA + B - (C+D+E+F) Producer Surplus G C + G+ C Government Revenue NoneE+ E Total Surplus A+B+C+D+E+F+GA+B+ C+ E+ G- (D + F) The area D+F shows the fall in total surplus and represents the deadweight loss of the tariff.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff u A tariff reduces the quantity of imports u A tariff reduces total surplus by the deadweight loss.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Other Benefits of International Trade u Increased variety of goods u Lower costs through economies of scale u Increased competition u Enhanced flow of ideas

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Arguments for Restricting Trade u Jobs u National Security u Infant Industry u Unfair Competition u Protection as a Bargaining Chip

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u The effects of free trade can be determined by comparing the domestic price without trade to the world price. u A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. u A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u When a country allows trade and becomes an exporter of a good, producers of the good are better off, and consumers of the good are worse off. u When a country allows trade and becomes an importer of a good, consumers of the good are better off, and producers are worse off.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u A tariff – a tax on imports – moves a market closer to the equilibrium than would exist without trade, and therefore reduces the gains from trade. u Import quotas will have effects similar to those of tariffs.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. u Economists, however, believe that free trade is usually the better policy.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Graphical Review

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Equilibrium Without Trade... Price of Steel Equilibrium Price 0Quantity of Steel Equilibrium quantity Domestic supply Domestic demand Producer surplus Consumer surplus

International Trade in an Exporting Country... Price of Steel 0Quantity of Steel Domestic demand Domestic supply World price Price after trade Exports Domestic quantity demanded Domestic quantity supplied Price before trade Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

How Free Trade Affects Welfare in an Exporting Country... Price of Steel 0Quantity of Steel World price Domestic demand Domestic supply Price after trade Price before trade A B C D Exports

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How Free Trade Affects Welfare in an Exporting Country... Price of Steel 0Quantity of Steel World price Domestic demand Domestic supply Price after trade Price before trade A Consumer surplus before trade B C Producer surplus before trade

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How Free Trade Affects Welfare in an Exporting Country... Price of Steel 0Quantity of Steel World price Domestic demand Domestic supply Price after trade Price before trade A Consumer surplus after trade C B Producer surplus after trade D Exports

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. International Trade and the Importing Country... Price of Steel 0Quantity of Steel Domestic supply Domestic demand World Price Price after trade Domestic quantity demanded Domestic quantity supplied Price before trade Imports

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How Free Trade Affects Welfare in an Importing Country... Price of Steel 0Quantity of Steel Domestic supply World Price Domestic demand Price after trade Price before trade A B C D Imports

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How Free Trade Affects Welfare in an Importing Country... Price of Steel 0Quantity of Steel Domestic supply World Price Domestic demand Price after trade Price before trade A Consumer surplus before trade C B Producer surplus before trade

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How Free Trade Affects Welfare in an Importing Country... Price of Steel 0Quantity of Steel Domestic supply World Price Domestic demand Price after trade Price before trade A Consumer surplus after trade B D C Producer surplus after trade Imports

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price with tariff World price Price without tariff Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff Q1SQ1S Q1DQ1D Imports without tariff Imports with tariff Q2DQ2D Q2SQ2S

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand World price Q1SQ1S Q1DQ1D Price without tariff Imports without tariff Consumer surplus before tariff Producer surplus before tariff

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Price without tariff Price with tariff Imports without tariff Imports with tariff A Consumer surplus with tariff B

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Imports without tariff Imports with tariff C G Producer surplus before tariff

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Imports without tariff Imports with tariff E Tariff revenue Price with tariff Price without tariff

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of a Tariff... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Tariff World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Price without tariff Price with tariff Imports without tariff Imports with tariff A B CE G DF Deadweight loss

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of an Import Quota... Price with quota World price Price without quota Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Q1SQ1S Q2SQ2S Q2DQ2D Imports without quota Imports with quota Domestic supply + Import Supply Quota Equilibrium with quota Equilibrium without trade Q1DQ1D

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Effects of an Import Quota... Price of Steel 0 Quantity of Steel Domestic supply Domestic demand World price Q1SQ1S Q2SQ2S Q2DQ2D Q1DQ1D Price without quota Price with quota Imports without quota Imports with quota Domestic supply + Import Supply Quota A B CE'E' E '' F G D