Chapter 9: International Trade Determinants of Trade: The World Price and Comparative Advantage: ! World price- price of a good that prevails in the world market for that good ! If the price of a good is higher abroad, producers will export that product (country has a comparative advantage) The Winners and Losers from Trade: The Gains and Losses of an Exporting Country: ! World demand curve (world price line) is perfectly elastic because exporter can sell as many products as it wants at the world price ! Producer Surplus rises from C to B+C+D ! Sellers benefit b/c surplus rises, buyers are worse off b/c surplus falls (Total Surplus rises by D) ! Conclusion: o When a country allows trade and becomes an exporter of a good, domestic producers of the good are better off, and domestic consumers of the good are worse of o Trade raises the economic well being of a nation in the sense that the gains of the winners exceed the losses of the losers. The Gains and Losses of an Importing Country:! Supply curve (world price) is perfectly elastic b/c importer can buy as many textiles as it wants at the world price ! Consumer surplus rises from A to A+B+D; total surplus rises by D ! Buyers benefit b/c consumer surplus increases; sellers are worse off b/c producer surplus falls ! Gains of buyers exceed the losses of sellers, and total surplus increases by the area D ! Conclusion: o When a country allows trade and becomes an importer of a good, domestic consumers of the good are better off, and domestic producers of the good are worse off. o Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers The Effects of a Tariff: ! Tariff- tax on goods produced abroad and sold domestically (tax on imported goods) ! Tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade ! Domestic sellers are better off, and domestic buyers are worse off, gov’t raises revenue ! To determine the total welfare effects of the tariff: add change in consumer surplus (negative), change in producer surplus (positive), and change in gov’t revenue (positive) ! Fall in total surplus (D+F) is the deadweight loss of the tariff Other Benefits of International Trade: ! Increased variety of goods ! Lower costs thru economies of scale- some goods are cheaper is produced in large scale ! Increased competition ! Enhanced flow of ideas The Arguments for Restricting Trade: The Jobs Argument: ! free trade creates jobs at the same time that it destroys them ! Even if one country is better than another country at producing everything, each country can still gain from trading with the other ! Workers in each country will eventually find jobs in an industry in which that country has a comparative advantage The National Security Argument: ! if a country becomes dependent on other countries for materials to make weapons and a war broke out, it may not be able to defend itself ! Companies have an incentive to exaggerate their role in national defense to obtain protection from foreign competition ! when the military is a consumer of an industry's output, it would benefit from imports The Infant-Industry Argument: ! New industries sometimes argue for temporary trade restrictions to help them get started ! older industries sometimes argue that they need temporary protection to help them adjust to new conditions ! To apply protection successfully, the government would need to decide which industries will eventually be profitable and decide whether the benefits of establishing these industries exceed the costs of this protection to consumers ! History shows that start-up firms often incur temporary losses and succeed in the long run, even without protection from competition.The Unfair-Competition Argument: ! If firms in different countries are subject to different laws and regulations, then it is unfair (the argument goes) to expect the firms to compete in the international marketplace. ! The gains of the consumers from buying at the low price would exceed the losses of the producers ! Country A’s subsidy to an industry may be a bad policy, but it is the taxpayers who bear the burden. Country B can benefit from the opportunity to buy textiles at a subsidized price The Protection-as-a-Bargaining-Chip: ! Many policymakers claim to support free trade but argue that trade restrictions can be useful when we bargain with our trading partners ! They claim that the threat of a trade restriction can help remove a trade restriction already imposed by a foreign government ! The problem with this bargaining strategy is that the threat may not work. ! Country can carry out its threat and implement the trade restriction, which would reduce its own economic welfare. Or it can back down from its threat, which would cause it to lose prestige in international affairs. ! Faced with this choice, the country would probably wish that it had never made the threat in the first
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