1. Application: International trade
Chapter 9
Application: International trade

2. Outline Trade can make everyone better off
Principle of comparative advantage
Gains and losses from trade
Effects of a tariff and import quota on trade
Implications for trade policy
Arguments for restricting trade

3. Recap: Gains from Trade
The gains from trade are less obvious when one person/country is better at producing both goods.
Principle of absolute advantage compares producers of a good according to their productivity
Principle of comparative advantage compares producers of a good according to their opportunity cost
With trade, both countries can produce more of one commodity and consume more of both commodities (founded upon principle of comparative advantage)

4. Gains from Trade
It is impossible for a producer to have a comparative advantage in the production of both the goods. Why?
If two producers have different opportunity costs they gain from trade as the price of the good they buy is less than their opportunity cost for that good

5. Interdependence and the gains from trade
To summarize:
Comparative advantage Specialization
Economic well-being Increase in production
Gains from trade
Trade

6. The Determinants of Trade
Equilibrium with out trade:
Economy is closed.
Domestic supply and domestic demand determine equilibrium price.
Equilibrium with trade:
Principle of comparative advantage involves comparison of domestic price and world price for the traded good.
If domestic price is less than world price, then the country becomes an exporter of the good.
If domestic price is greater than world price then country becomes and importer of the good.

7. Winners and losers from trade
Gains and losses of an exporting country
The country is a price taker in the world economy.
Exports= domestic supply at world price- domestic demand at world price.
Increase in domestic producer surplus
Decrease in domestic consumer surplus
However trade raises the total surplus in the economy

8. Winners and losers from trade
Gains and losses of an importing country
The country is a price taker in the world economy.
Imports= domestic demand at world price- domestic supply at world price.
Decrease in domestic producer surplus
Increase in domestic consumer surplus
However trade raises the total surplus in the economy