McGraw-Hill/Irwin Copyright  2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 2: The Basic Theory Using Demand and Supply

2-2 Key Questions About International Trade 1. Why do countries trade? What is the basis for trade, especially the product (commodity) composition? 2. For each country, what are the overall gains (or losses) from trade? 3. What are the effects of trade on each country’s economic structure? Production, Consumption. 4. What are the effects of trade on the distribution of income within each country? Winners, Losers.

2-3 The Basic Theory Using Demand and Supply 国际贸易供求分析

Introduction Objective Objective To analyze free trade equilibrium and gains from trade. To analyze free trade equilibrium and gains from trade.

2-5  Contents  Demand and supply curves  Consumer and producer surplus  No-trade (Autarky) equilibrium  Free trade equilibrium  Effects of free trade

Four Questions about Trade 1. Why do countries trade? What determines the pattern of trade ? 2. How does trade affect each country’s production and consumption? 3. How does trade affect the economic well-being of each country? 4. How does trade affect the distribution of income among various groups within each country?

Demand and Supply  Demand Curve The relationship between the price charged and the quantity of a good demanded. For a normal good, demand declines when price rises.

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Demand and Supply  Price elasticity of demand Change in quantity demanded (%) e=- Change in price (%)  If e ＞ 1, demand is elastic;  If e ＜ 1, demand is inelastic.

Demand and Supply  Consumer Surplus 消费者剩余 Consumer well-being from the difference between the value of a good and the price paid for it.

2-11 At $2000/unit Total value (V)= c+t+u Total payment (P)= t+u Consumer surplus = V - P = c At $1000/unit ?

Demand and Supply  Supply Curve The relationship between the price charged and the quantity of a good supplied.

2-13 Upward sloping: Increasing marginal cost 边际成本递增

Demand and Supply  Price elasticity of supply Change in quantity supplied (%) e= Change in price (%)  If e ＞ 1, supply is elastic;  If e ＜ 1, supply is inelastic.

Demand and Supply  Producer Surplus 生产者剩余 Producer well-being from the difference between the revenue received and the cost incurred.

2-16 At $1000/unit Total Revenue (R)= e+z Total Cost (C)= z Producer surplus = R - C = e At $2000/unit ?

No-trade Equilibrium National supply = National Demand

2-18 Consumer surplus= c Producer surplus= h c=h ?

Free Trade Equilibrium  A two-country world  Home country: USA  Foreign country: The rest of the world

2-20 No-trade Equilibrium: A

2-21 No-trade equilibrium: H

Free Trade Equilibrium  Price Change and Trade  Rest of the world: Exporter Price Production Consumption Export = Production - Consumption

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Free Trade Equilibrium  Price Change and Trade  USA: Importer Price Production Consumption Import = Consumption - Production

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2-26  Free Trade Equilibrium Foreign Exports = US Imports

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2-28  Free Trade Equilibrium  Foreign Exports = US Imports = 50 thousand units  Price = $1000/unit

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2-30  Free Trade Equilibrium What if world price is above or below $1000/unit ?

Gap Free Trade Equilibrium

Effects of Free Trade  Effects in the importing country  Effects on consumers  Effects on producers  Effects on the whole country

2-33 Producer surplus: - a Consumer surplus: + (a+b+d ) Net national gains: b+d One dollar, one vote metric

Effects of Free Trade  Effects in the exporting country  Effects on consumers  Effects on producers  Effects on the whole country

2-35 Producer surplus: + (j+k+n) Consumer surplus: - (j+k) Net national gains: +n

Effects of Free Trade  Which country gains more? Both countries gain from free trade, but the gains may be unequal.

2-37 Which country gains more?

2-38 Comparing (b+d) and n The side with less elastic trade curve gains more. n: exporter ’ s surplus b+d : importer ’ s surplus

Summary  A product will be exported from countries where its price was lower without trade to countries where its price was higher.  Trade affects production and consumption in both countries. In the exporting country, production rises while consumption falls. The opposite is true for the importing country.

2-40 Summary  Both countries gain from free trade. The country with a less elastic trade curve or a larger price change gains more.  Within the trading countries, gainers are producers of exportable products and consumers of imported products; losers are producers of import-competing products and consumers of exportable products.

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