Session 2 The Basic Theory Using Demand and Supply

Key Questions About International Trade  Which in each country, who are the gainers and losers from opening trade ?  How does trade effect production and consumption in each country ?  Which country gain from trade ?  Why do countries trade? More precisely, what determines which products a country export and which products it import ?

Trade Usually Results from The Interaction of Competitive Demand and Supply. Demand Supply What are the factors influencing the demand ? What are the factors influencing the supply ? SupplyDemand Supply What will happen if the demand and supply are unmatched ?

Demand and Supply for Motorbikes Consumer Surplus Producer Surplus

The Market for Motorbikes: Demand and Supply No-trade EquilibriumConsumer Surplus Producer Surplus

The Effects of Trade on Production, Consumption, and Price, Shown with Demand and Supply Curves Pre-trade Price World Price with Trade Imports Pre-trade Price World Price with Trade Exports SfSf Df Sx Dx

The Effects of Trade on Production, Consumption, and Price, Shown with Demand and Supply Curve

The Effects of Trade on Well-Being of Producers, Consumers, and the Nation as a Whole Which one better ?

Key Concerned Issue Regarding Net Nation Gain One dollar, one vote The Welfare Effects

Which Country Gain More ? Dx Sx Sx = Represent Exporting Country Dx = Represent Importing Country Consumer Surplus Producer Surplus

CountryPre-trade Price Free Trade Price Price Change (percent) U.S. (Importer) 2,0001,000100% The Rest of the World (Exporter) 7001,00030% Gain More

Importing Country (U.S.) Take Some Disadvantages Producers Take Some Advantages Consumers Exporting Country (The Rest of the Word) Take Some Advantages Producers Take Some Disadvantages Consumers What if they are rich ? What if they are poor ?