Slide 0In this chapter, look for the answers to these questions:IntroductionThe World Price and Comparative AdvantageThe Small Economy AssumptionA Country That Exports SoybeansSlide 7A C T I V E L E A R N I N G 1: Analysis of tradeA C T I V E L E A R N I N G 1: AnswersSlide 10Summary: The Welfare Effects of TradeOther Benefits of International TradeThen Why All the Opposition to Trade?Tariff: An Example of a Trade RestrictionAnalysis of a Tariff on Cotton ShirtsSlide 16Slide 17Import Quotas: Another Way to Restrict TradeIn the News: Textile Imports from ChinaArguments for Restricting TradeU.S. imports & unemployment, decade averages, 1956-2005Slide 22Slide 23Slide 24Slide 25Slide 26Trade AgreementsCHAPTER SUMMARYSlide 29© 2007 Thomson South-Western, all rights reservedN. G R E G O R Y M A N K I WPowerPoint® Slidesby Ron Cronovich 9P R I N C I P L E S O FF O U R T H E D I T I O NApplication: International TradeApplication: International TradeCHAPTER 9 APPLICATION: INTERNATIONAL TRADE2In this chapter, look for the answers to these questions:What determines how much of a good a country will import or export? Who benefits from trade? Who does trade harm? Do the gains outweigh the losses? If policymakers restrict imports, who benefits? Who is harmed? Do the gains of the policy outweigh the losses? What are some common arguments for restricting trade? Do they have merit?CHAPTER 9 APPLICATION: INTERNATIONAL TRADE3IntroductionRecall from Chapter 3: A country has a comparative advantage in a good if it produces the good at lower opportunity cost than other countries. Countries can gain from trade if each exports the goods in which it has a comparative advantage. Now we apply the tools of welfare economics to see where these gains come from and who gets them.CHAPTER 9 APPLICATION: INTERNATIONAL TRADE4The World Price and Comparative AdvantagePW = the world price of a good, the price that prevails in world markets PD = domestic price without trade If PD < PW, •country has comparative advantage in the good•under free trade, country exports the goodIf PD > PW, •country does not have comparative advantage •under free trade, country imports the goodCHAPTER 9 APPLICATION: INTERNATIONAL TRADE5The Small Economy AssumptionA small economy is a price taker in world markets: Its actions have no affect on PW. Not always true – especially for the U.S. – but simplifies the analysis without changing its lessons. When a small economy engages in free trade,PW is the only relevant price: •No seller would accept less than PW, because she could sell the good for PW in world markets. •No buyer would pay more than PW, because he could buy the good for PW in world markets.CHAPTER 9 APPLICATION: INTERNATIONAL TRADE6A Country That Exports SoybeansWithout trade, PD = $4 Q = 500PW = $6 Under free trade, •domestic consumers demand 300 •domestic producers supply 750•exports = 450PQDS$6$4500300Soybeansexports750CHAPTER 9 APPLICATION: INTERNATIONAL TRADE7A Country That Exports SoybeansWithout trade,CS = A + BPS = CTotal surplus = A + B + CWith trade, CS = APS = B + C + DTotal surplus = A + B + C + DPQDS$6$4SoybeansexportsABDCgains from tradeAA CC TT II VV E LE L EE AA RR NN II NN G G 11: : Analysis of tradeAnalysis of tradeWithout trade,PD = $3000, Q = 400In world markets, PW = $1500 Under free trade, how many TVs will the country import or export?Identify CS, PS, and total surplus without trade, and with trade. 8PQDS$1500200$3000400600Plasma TVsAA CC TT II VV E LE L EE AA RR NN II NN G G 11: : AnswersAnswers9Under free trade, •domestic consumers demand 600 •domestic producers supply 200•imports = 400PQDS$1500200$3000600Plasma TVsimportsAA CC TT II VV E LE L EE AA RR NN II NN G G 11: : AnswersAnswers10Without trade, CS = APS = B + CTotal surplus = A + B + CWith trade, CS = A + B + DPS = CTotal surplus = A + B + C + DPQDS$1500$3000Plasma TVsABDCgains from tradeimportsCHAPTER 9 APPLICATION: INTERNATIONAL TRADE11total surplusproducer surplusconsumer surplusdirection of traderisesfallsrisesimportsPD > PWrisesrisesfallsexportsPD < PWSummary: The Welfare Effects of TradeWhether a good is imported or exported, trade creates winners and losers. But the gains exceed the losses.CHAPTER 9 APPLICATION: INTERNATIONAL TRADE12Other Benefits of International TradeConsumers enjoy increased variety of goods.Producers sell to a larger market and may achieve lower costs through economies of scale.Competition from abroad may reduce market power of some firms, which would increase total welfare.Trade enhances the flow of ideas, facilitates the spread of technology around the world.CHAPTER 9 APPLICATION: INTERNATIONAL TRADE13Then Why All the Opposition to Trade?Recall one of the Ten Principles: Trade can make everyone better off. The winners from trade could compensate the losers and still be better off. Yet, such compensation rarely occurs.The losses are often highly concentrated among a small group of people, who feel them acutely. The gains are often spread thinly over many people, who may not see how trade benefits them.Hence, the losers have more incentive to organize and lobby for restrictions on trade.CHAPTER 9 APPLICATION: INTERNATIONAL TRADE14Tariff: An Example of a Trade RestrictionTariff: a tax on imports Example: Cotton shirtsPW = $20Tariff: T = $10/shirtConsumers must pay $30 for an imported shirt. So, domestic producers can charge $30 per shirt. In general, the price facing domestic buyers & sellers equals (PW + T ).CHAPTER 9 APPLICATION: INTERNATIONAL TRADE15$30Analysis of a Tariff on Cotton ShirtsPW = $20free trade:buyers demand 80sellers supply 25imports = 55T = $10/shirtprice rises to $30buyers demand 70sellers supply 40imports = 30PQDS$2025Cotton shirts407080importsimportsCHAPTER 9 APPLICATION: INTERNATIONAL TRADE16$30Analysis of a Tariff on Cotton Shirtsfree tradeCS = A + B + C + D + E + FPS = GTotal surplus = A + B + C + D + E + F + GtariffCS = A + BPS = C + GRevenue = ETotal surplus = A + B + C + E + GPQDS$2025Cotton shirts40ABDEGFC7080deadweight loss = D + FCHAPTER 9 APPLICATION: INTERNATIONAL TRADE17$30Analysis of a Tariff on Cotton ShirtsD = deadweight loss from the overproduction of shirtsF = deadweight loss from the under-consumption of shirtsPQDS$2025Cotton shirts40ABDEGFC7080deadweight loss = D +