We now return to the study of international trade and take up these questions. Over the past several chapters, we have developed many tools for analyzing how markets work: supply, demand, equilibrium, consumer surplus, producer surplus, and so on. With these tools we can learn more about the effects of international trade on economic well-being.
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• What determines whether a country imports or
exports a good?
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• Who gains and who loses from free trade
among countries?
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• What are the arguments that people use to
advocate trade restrictions?
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THE DETERMINANTS OF TRADE
• Equilibrium Without Trade
• Assume:
• A country is isolated from rest of the world and produces steel.
• The market for steel consists of the buyers and sellers in the country.
• No one in the country is allowed to import or export steel.
Trang 6Figure 1The Equilibrium without International Trade
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Consumer surplus
Producer surplus
Domestic demand
Equilibrium
price
Equilibrium quantity
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The Equilibrium Without International Trade
• Equilibrium Without Trade
• Results:
• Domestic price adjusts to balance demand and supply.
• The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive.
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The World Price and Comparative Advantage
• If the country decides to engage in international trade, will it be an importer or exporter of steel?
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The World Price and Comparative Advantage
• 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
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The World Price and Comparative Advantage
• 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
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The World Price and Comparative Advantage
• 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.
Trang 12Figure 2 International Trade in an Exporting Country
Price
before
trade
Domestic quantity demanded
Domestic quantity supplied
Trang 13Figure 3 How Free Trade Affects Welfare in an Exporting Country
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D
C B A
Exports
Price
before
trade
Trang 14Figure 3 How Free Trade Affects Welfare in an Exporting Country
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D
C B A
Consumer surplus before trade
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How Free Trade Affects Welfare in
an Exporting Country
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THE WINNERS AND LOSERS
FROM TRADE
• 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.
• Trade raises the economic wellbeing of the nation
as a whole.
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The Gains and Losses of an Importing
Country
• International Trade in an Importing Country
• If the world price of steel is lower than the domestic price, the country will be an importer of steel when trade is permitted.
• Domestic consumers will want to buy steel at the
lower world price.
• Domestic producers of steel will have to lower their output because the domestic price moves to the
world price.
Trang 18Figure 4 International Trade in an Importing Country
of Steel
Domestic supply
Domestic demand
Imports
Domestic quantity supplied
Domestic quantity demanded
Price
before
trade
Trang 19Figure 5 How Free Trade Affects Welfare in an Importing Country
Domestic demand
Price
after trade
World price Imports
Price
before trade
Trang 20Figure 5 How Free Trade Affects Welfare in an Importing Country
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C
B A
Domestic demand
Price
after trade
World price
Price
before trade
Consumer surplus before trade
Producer surplus before trade
Trang 21Figure 5 How Free Trade Affects Welfare in an Importing Country
Domestic demand
Price
after trade
World price Imports
Price
before trade
Producer surplus after trade
Consumer surplus after trade
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How Free Trade Affects Welfare in
an Importing Country
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THE WINNERS AND LOSERS
• Trade raises the economic wellbeing of the nation as a whole because the gains of consumers exceed the losses
of producers.
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THE WINNERS AND LOSERS
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The Effects of a Tariff
• 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
Trang 26Figure 6 The Effects of a Tariff
Domestic demand
Price
Imports without tariff
Equilibrium without trade
Price
without tariff
World price Imports
with tariff
Q S
Trang 27Figure 6 The Effects of a Tariff
Domestic demand
Imports without tariff
Equilibrium without trade
Price without tariff
World price
Trang 28Figure 6 The Effects of a Tariff
Domestic demand
Price
Imports without tariff
Equilibrium without trade
Price
without tariff
World price Imports
with tariff
Q S
Consumer surplus with tariff
Trang 29Figure 6 The Effects of a Tariff
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C G
Domestic demand
Price
Imports without tariff
Equilibrium without trade
Price
without tariff
World price
Q S
Imports with tariff
Producer surplus after tariff
Trang 30Figure 6 The Effects of a Tariff
Domestic demand
Price
Imports without tariff
Price
without tariff
World price
Q S
Imports with tariff
Tariff Revenue
Trang 31Figure 6 The Effects of a Tariff
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C G
Domestic demand
Price
Imports without tariff
Price
without tariff
World price Imports
with tariff
Q S
Deadweight Loss
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The Effects of a Tariff
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The Effects of a Tariff
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The Effects of an Import Quota
• An import quota is a limit on the quantity of a
good that can be produced abroad and sold
domestically
Trang 35Figure 7 The Effects of an Import Quota
Domestic supply + Import supply
Domestic demand
Isolandian
price with
quota
Imports without quota
Equilibrium with quota
Equilibrium without trade
Quota
Imports with quota
Q D
World price
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The Effects of an Import Quota
Trang 37Figure 7 The Effects of an Import Quota
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A
E' C
Domestic supply + Import supply
Domestic demand
Isolandian
price with
quota
Imports without quota
Equilibrium with quota
Equilibrium without trade
Quota
Imports with quota
Q D
World price
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The Effects of an Import Quota
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The Effects of an Import Quota
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The Lessons for Trade Policy
• If government sells import licenses for full
value, revenue equals that of an equivalent
tariff and the results of tariffs and quotas are
identical
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The Lessons for Trade Policy
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The Lessons for Trade Policy
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THE ARGUMENTS FOR RESTRICTING TRADE
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CASE STUDY: Trade Agreements and the
World Trade Organization
• Unilateral: when a country removes its trade Unilateral
restrictions on its own
• Multilateral: a country reduces its trade Multilateral
restrictions while other countries do the same
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CASE STUDY: Trade Agreements and the
World Trade Organization
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CASE STUDY: Trade Agreements and the
World Trade Organization
• 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.
• GATT has successfully reduced the average tariff
among member countries from about 40 percent
after WWII to about 5 percent today.
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• 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.
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Summary
• 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
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