1. International Monetary Systems
Topic: International Trade and Trade Restrictions

2. Administrative things
Course syllabus, group presentation info, future materials will be posted on:
You will indicate which financial crisis your group will present on by editing a Google Doc. The link to the document is:
goo.gl/Xjl09g

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

4. 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)

5. United States Trade Balance

6. France Trade Balance

7. Consider a country Isoland and the domestic market for textiles

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

9. 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.

10. Isoland and World Textile MarketsP P Q Q
Isoland’s Textile Market
World Textile Market

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

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

13. 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)?

14. 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
The tariff raises the price of the good relative to world price (which is also the domestic price without trade restrictions)

15. Welfare measures with tariffs (tax on imports)

16. 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.

17. QD = 8 – P
QS = P
PW = €1 per bag
Answer the following (drawing graphs will help!!):
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.
What are the gains from free trade in Euros? What is the deadweight loss from the trade restriction?