Chapter 9: Application-International TradeThe Determinants of Trade- World price: the price of a good that prevails in the world market for that goodo 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 abroado 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 advantageo 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 countrieso 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 marketis 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 - Importing countrieso 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 importo 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, domesticconsumers are better off and domestic producers are worse off &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 countryo 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 tradeo 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 argumento 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 longrun- National-security argument - The infant-industry argumento New industries want temporary trade restrictions to help them get started o Old industries want temporary trade restrictions to help them adjust to new conditions - The unfair-competition argumento Free trade is desirable only if all countries play by the same rules - The protection-as-a-bargaining-chip argumento Trade restrictions can be useful when we bargain with our trading
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