Chapter 9 Application International Trade The Determinants of Trade good World price the price of a good that prevails in the world market for that o If the world price of textiles is higher than the domestic price the country will export textiles bc producers will be eager to receive the higher prices available abroad o If the world price of textiles is lower than the domestic price the country will import textiles bc consumers will want the lower price o If the domestic price is low the cost of producing textiles in the country is low and the country has a comparative advantage o If the domestic price is high then the cost of producing textiles in the country is high and the foreign countries have a comparative advantage The Winners Losers From Trade Exporting countries o The domestic equilibrium price before trade is below the world price when the country becomes part of the world market the domestic price rises to equal the world price now there is more supplied domestically than demanded domestically therefore the country starts to export o Although domestic quantity supplied and demanded differ the market is still in equilibrium bc there is another participant world s demand for textiles is the perfectly elastic curve bc a country can sell as many textiles as it wants at the world price o Trade forces domestic price to rise producers benefit but consumers don t the gains of sellers exceed the losses of buyers so total surplus in the country increases o Conclusions trade raises the economic well being of a nation in the sense that the gains of the winners exceed the losses of the losers domestic producers of the good are better off and domestic consumers of the good are worse off when a country becomes an exporter of a good o The domestic price before trade is above the world price when the country becomes part of the world market the domestic price must equal the world price now there is more demanded than supplied therefore the country starts to import o Horizontal line at the world price represents the supply of the rest of the world perfectly elastic bc a country can buy as many textiles as it wants o Conclusions when a country becomes an importer of a good domestic consumers are better off and domestic producers are worse off Importing countries trade raises the economic well being of a nation in the sense that the gains of the winners exceed the losses of the losers Tariff a tax on goods produced abroad and sold domestically o Only affects country if it is an importing country o A tariff raises the price of imported textiles above the world price domestic suppliers can now sell their textiles for the world price plus the amount of the tariff therefore imported and domestic prices rise which affects the behavior of domestic buyers and sellers it reduces the quantity demanded and raises the domestic quantity supplied therefore the tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade o Domestic sellers are better off while domestic buyers are worse off o Fall in total surplus deadweight loss Benefits of international trade o Increased variety of goods o Lower costs through economies of scale some goods can be produced at low cost only if they are produced in large quantities economies of scale o Increased competition o Enhanced flow of ideas The Arguments for Restricting Trade The jobs argument o Trade with other countries can destroy domestic jobs o Price of textiles fall reduces quantity produced reduces jobs o However creates jobs at the same time just maybe in a different sector that has a comparative advantage may impose hardships on some in the short run but allows a higher standard of living in the long run National security argument The infant industry argument o New industries want temporary trade restrictions to help them get o Old industries want temporary trade restrictions to help them adjust to new conditions The unfair competition argument o Free trade is desirable only if all countries play by the same rules The protection as a bargaining chip argument o Trade restrictions can be useful when we bargain with our trading started partners
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