ECO2030 1nd Edition Lecture 21Outline of Last Lecture I. Deadweight lossesOutline of Current Lecture II. Application of international tradeIII. Trade and increased total surplusCurrent LectureApplication: International trade● The equilibrium without trade ○ only domestic buyersand sellers (closedeconomy)○ equilibrium price andquantity (determined onthe domestic market)● Need to determine who willgain and who will lose frominternational trade● Need to determine if the gainsexceed the losses● Need to compare world pricewith domestic price todetermine 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 exportedAllow for international tradeNeed 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 priceThese 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 goesup (more produced)● Domestic demand curve goesdown (less domesticconsumption due to higherprice)○ This is similar to surplus- however, since it isexported it is no longer asurplus● Consumer surplus = A + Bbefore trade and A after trade● Producer surplus = C beforetrade 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 wealthFigure 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 beforetrade and C after○ Again, total surplusincreases and D is theadditional gain ○ So trade makes the countrybetter of no matter what theprice of the good is○ TRADE MAKESEVERYONE BETTER OFF■ It does not matter ifthe world price islower or higher thanthe domestic price■ both imports andexports 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
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