Domestic SupplyDomestic DemandPrice Before tradeDomestic Quantity demandedQuantity BAprice After trade CDDomestic Quantity suppliedWorld PriceImports ECO2030 1nd Edition Lecture 22Outline of Last Lecture I. The effects of international tradeOutline of Current Lecture II. The effects of international trade III. The effects of tariffsIV. arguments for and against international tradeCurrent LectureQuick review● when you open up freetrade you must except theworld price● Trade always makes peoplebetter offRecall that the problem shown inthis graph is that it reducesemploymentWhat is done to address thisproblem is the use of tariffsHowever, a tariff reduces totalsurplus because total surplusbecomes less - it moves the marketcloser to the equilibrium it had without trade. In this case, area E = government revenue from the tariff. What is lost due to the tariff is area D and F. They are lost for ever. ● Total surplus before tariff = A+B+C+D+E+F+G● Total surplus after tariff = A+B+C+E+G● Consumers lose C+D+E+FThese 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.Domestic SupplyDomestic DemandPrice Before tradeImports w/o tariffQuantity cAprice w/ tariffBWorld PriceImportsw/ tariffGFEDprice w/o tariffTariff ● Producers gain C● Governmentgains E● Total surplus fallsby D+FThe effects of a tariff ● price rises by theamount of the tariff● Domestic quantitydemandeddecreases● domestic quantityproduced isincreases● demanders lose ● producers gainOther benefits from international trade:● increased variety of goods● lower costs through economies of scale (specialization)● increased competition● enhanced flow of ideasArguments for restricting trade: The job argument● trade with other countries destroys domestic jobs● However, free trade creates jobs at the same time it destroys themNational security argument:● the industry is vital for national security ● when there are legitimate concerns over national securityInfant industry argument:● new industries need temporary trade restrictions to help them get started● difficult to implement in practice● the temporary policy is hard to remove quickly● protection is not necessary for an industry to grow (if there product is better it will sell)The unfair-competition argument:● free trade is desirable only if all countries play by the same rules (e.g. do not undervalue their currency to compete with lower input costs)The protection as a bargaining chip argument:● Trade restrictions can be useful when we bargain with our trading partners● However, the threat may not workSummary of the effects of Tariffs:● Consumer surplus decreases● Producer surplus increases● Government gains tax revenue● Total surplus is always
View Full Document