1. International Trade GlobalizationGlobalization

2. Consider what determines whether a country imports or exports a good. Consider what determines whether a country imports or exports a good. Examine who wins and who loses from international trade. Examine who wins and who loses from international trade. Learn that the gains from to winners from international trade exceed the losses to losers. Learn that the gains from to winners from international trade exceed the losses to losers. Analyze the welfare effects of tariffs and import quotas. Analyze the welfare effects of tariffs and import quotas. Examine the arguments people use to advocate trade restrictions. Examine the arguments people use to advocate trade restrictions. In this chapter you will…

3. Consider the market for steel Consider the market for steel Steel market is well suited for examining the gains and losses from trade.Steel market is well suited for examining the gains and losses from trade. Produced in many countries and is much traded. Produced in many countries and is much traded. Trade restrictions are often implemented in this market. Trade restrictions are often implemented in this market. THE DETERMINANTS OF TRADE

4. Assume: Assume: A country is isolated from the world and produces steel.A country is isolated from the world and produces steel. The market for steel consists of the buyers and sellers in the country. (See Figure 9-1)The market for steel consists of the buyers and sellers in the country. (See Figure 9-1) No one in the country is allowed to import or export steel.No one in the country is allowed to import or export steel. The Equilibrium without Trade

5. Quantity of steel Price of steel 0 Consumer surplus Equilibrium price Equilibrium quantity E Producer surplus Domestic demand Domestic supply Figure 9-1: The Equilibrium without International Trade

6. Results: Results: Domestic price adjusts to balance demand and supply.Domestic price adjusts to balance demand and supply. The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive.The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive. The Equilibrium without Trade

7. If the country decides to engage in international trade, will it be an importer or exporter of steel? If the country decides to engage in international trade, will it be an importer or exporter of steel? The effects of free trade can be shown by comparing the domestic price of a good without trade and the world price of the good. The effects of free trade can be shown by comparing the domestic price of a good without trade and the world price of the good. The world price refers to the price that prevails in the world market for that good. The world price refers to the price that prevails in the world market for that good. The World Price and Comparative Advantage

8. 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. 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. 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. 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. The World Price and Comparative Advantage

9. To analyze the welfare effects of free trade, the economists begin with the assumption that the country is a small economy. To analyze the welfare effects of free trade, the economists begin with the assumption that the country is a small economy. The country is a price taker.The country is a price taker. Price taker means that the country takes the world price of steel as given. They can sell steel at this price and be exporters or buy steel at this price and be importers.Price taker means that the country takes the world price of steel as given. They can sell steel at this price and be exporters or buy steel at this price and be importers. THE WINNERS AND LOSERS FROM TRADE

10. 0 Quantity of Steel Price of Steel Price before trade Exports Price after trade World price Domestic quantity Demanded Domestic quantity Supplied Domestic demand Domestic supply Figure 9-2: International Trade in an Exporting Country Exporting Country

11. Domestic demand Domestic supply 0 Quantity of Steel Price of Steel Exports Exporting Country Price after trade World price A B C D Price before trade Figure 9-3: How Free Trade affects Welfare in an Exporting Country

12. Table 9-1: Changes in Welfare from a Free Trade: The Case of an Exporting Country

13. The analysis of an exporting country yields two conclusions: The analysis of an exporting country yields two conclusions: Domestic producers of the good are better off, and domestic consumers of the good are worse off.Domestic producers of the good are better off, and domestic consumers of the good are worse off. Trade raises the economic well-being of the nation as a whole.Trade raises the economic well-being of the nation as a whole. The Gains and Losses of an Exporting Country

14. 0 Quantity of Steel Price of Steel Imports Price after trade World price Price before trade Domestic quantity Supplied Importing Country Domestic demand Domestic supply Domestic quantity Demanded Figure 9-4: International trade in an Importing Country

15. Domestic demand Domestic supply 0 Quantity of Steel Price of Steel Imports Importing Country D C B A Price after trade World price Price before trade Figure 9-5: How Free Trade affects Welfare in an Importing Country

16. Table 9-2: Changes in Welfare from Free Trade: The Case of an Importing Country

17. The analysis of an importing country yields two conclusions: The analysis of an importing country yields two conclusions: Domestic producers of the good are worse off, and domestic consumers of the good are better off.Domestic producers of the good are worse off, and domestic consumers of the good are better off. Trade raises the economic well-being of the nation as a whole because the gains of consumers exceed the losses of producers.Trade raises the economic well-being of the nation as a whole because the gains of consumers exceed the losses of producers. The Gains and Losses of an Importing Country

18. A tariff is a tax on goods produced abroad and sold domestically. A tariff is a tax on goods produced abroad and sold domestically. Tariffs raise the price of imported goods above the world price by the amount of the tariff. Tariffs raise the price of imported goods above the world price by the amount of the tariff. The Effects of a Tariff

19. Domestic supply 0 Quantity of Steel Price of Steel Imports without tariffs Tariff Equilibrium without trade Imports with tariffs D E F B C G A Price with tariff Price without tariff World price QS1QS1 QS2QS2 QD2QD2 QD1QD1 Domestic demand Figure 9-6: The Effects of a Tariff

20. Table 9-3: Changes in Welfare from a Tariff

21. A tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade. A tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade. With a tariff, total surplus in the market decreases by an amount referred to as a deadweight loss. With a tariff, total surplus in the market decreases by an amount referred to as a deadweight loss. The Effects of a Tariff

22. An import quota is a limit on the quantity of a good that can be produced abroad and sold domestically. An import quota is a limit on the quantity of a good that can be produced abroad and sold domestically. The Effects of an Import Quota

23. Domestic supply 0 Quantity of Steel Price of Steel Imports without quotas Equilibrium without trade Imports with quota D E F B C G A Isolandian price with quota Price without quota = World price World price QS1QS1 QS2QS2 QD1QD1 Domestic demand E’ Domestic supply + Import supply Equilibrium with quota QD2QD2 Quota Figure 9-7: The Effects of an Import Quota

24. Table 9-4: Changes in Welfare from an Import Quota

25. Because the quota raises the domestic price above the world price, domestic buyers of the good are worse off, and domestic sellers of the good are better off. Because the quota raises the domestic price above the world price, domestic buyers of the good are worse off, and domestic sellers of the good are better off. License holders are better off because they make a profit from buying at the world price and selling at the higher domestic price. License holders are better off because they make a profit from buying at the world price and selling at the higher domestic price. The Effects of an Import Quota

26. With a quota, total surplus in the market decreases by an amount referred to as a deadweight loss. With a quota, total surplus in the market decreases by an amount referred to as a deadweight loss. The quota can potentially cause an even larger deadweight loss, if a mechanism such as lobbying is employed to allocate the import licenses. The quota can potentially cause an even larger deadweight loss, if a mechanism such as lobbying is employed to allocate the import licenses. The Effects of an Import Quota

27. If a government sells import licenses for full value, revenue equals that of an equivalent tariff and the results of tariffs and quotas are identical. If a government sells import licenses for full value, revenue equals that of an equivalent tariff and the results of tariffs and quotas are identical. Both tariffs and import quotas... Both tariffs and import quotas... raise domestic prices.raise domestic prices. reduce the welfare of domestic consumers.reduce the welfare of domestic consumers. increase the welfare of domestic producers.increase the welfare of domestic producers. cause deadweight losses.cause deadweight losses. The Lessons for Free Trade Policy

28. Other Benefits of International Trade Other Benefits of International Trade Increased variety of goods.Increased variety of goods. Lower costs through economies of scale.Lower costs through economies of scale. Increased competition.Increased competition. Enhanced flow of ideas.Enhanced flow of ideas. The Lessons for Free Trade Policy

29. The jobs argument. The jobs argument. The National-Security argument. The National-Security argument. The infant-industry argument. The infant-industry argument. The unfair-competition argument. The unfair-competition argument. The protection-as-a-bargaining chip argument. The protection-as-a-bargaining chip argument. THE ARGUMENTS FOR RESTRICTING TRADE

30. Unilateral: when a country removes its trade restrictions on its own. Unilateral: when a country removes its trade restrictions on its own. Multilateral: a country reduces its trade restrictions while other countries do the same. Multilateral: a country reduces its trade restrictions while other countries do the same. NAFTA NAFTA The North American Free Trade Agreement (NAFTA) is an example of a multilateral trade agreement.The North American Free Trade Agreement (NAFTA) is an example of a multilateral trade agreement. In 1993, NAFTA lowered the trade barriers among the United States, Mexico, and Canada.In 1993, NAFTA lowered the trade barriers among the United States, Mexico, and Canada. CASE STUDY: Trade Agreements and the WTO

31. GATT GATT The General Agreement on Tariffs and Trade (GATT) refers to a continuing series of negotiations among many of the world’s countries with a goal of promoting free trade.The General Agreement on Tariffs and Trade (GATT) refers to a continuing series of negotiations among many of the world’s countries with a goal of promoting free trade. GATT has successfully reduced the average tariff among member countries from about 40 percent after WWII to about 5 percent today.GATT has successfully reduced the average tariff among member countries from about 40 percent after WWII to about 5 percent today. CASE STUDY: Trade Agreements and the WTO

32. The effects of free trade can be determined by comparing the domestic price without trade to the world price. The effects of free trade can be determined by comparing the domestic price without trade to the world price. A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter.A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. 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.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.Summary

33. 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. 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. When a country allows trade and becomes an importer of a good, consumers of the good are better off, and producers are worse off. When a country allows trade and becomes an importer of a good, consumers of the good are better off, and producers are worse off.Summary

34. 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. 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. Import quotas will have effects similar to those of tariffs. Import quotas will have effects similar to those of tariffs.Summary

35. There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. Economists, however, believe that free trade is usually the better policy. Economists, however, believe that free trade is usually the better policy.Summary

36. The End