ECO2030 1nd Edition Lecture 21 Outline of Last Lecture I Deadweight losses Outline of Current Lecture II Application of international trade III Trade and increased total surplus Current Lecture Application International trade The equilibrium without trade only domestic buyers and sellers closed economy equilibrium price and quantity determined on the domestic market Need to determine who will gain and who will lose from international trade Need to determine if the gains exceed the losses Need to compare world price with domestic price to determine who has the comparative advantage Once trade is allowed the domestic price becomes the same as the world price A tariff a tax on an import good A Quota a limit on the amount that can be exported Allow for international trade Need to know what is the world price What is the Domestic no trade price Determine who has comparative advantage If the Domestic price world price Export good because the country has a comparative advantage Can sell for higher price supply cost must be lower If the Domestic price World price These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Import good because the rest of the world has the comparative advantage Rest of the world has lower input costs Figure 2 Exporting country Domestic supply curve goes up more produced Domestic demand curve goes down less domestic consumption due to higher price This is similar to surplus however since it is exported it is no longer a surplus Consumer surplus A B before trade and A after trade Producer surplus C before trade and B C D after trade Because the gains from increased producer surplus exceeds the losses in consumer surplus trade makes the economy better of Total surplus is increased area D is new wealth Figure 3 Importing country Domestic Supply goes down because price is less rest of world has a comparative advantage they can produce at a lower price Domestic Demand increases because price is less Consumer surplus A before trade and A B D after Producer surplus B C before trade and C after Again total surplus increases and D is the additional gain So trade makes the country better of no matter what the price of the good is TRADE MAKES EVERYONE BETTER OFF It does not matter if the world price is lower or higher than the domestic price both imports and exports make a country better off Problem here is unemployment because many producers leave the market because world price is too low to compete This is because in this case the consumers gain and the producers lose
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