Principles of Microeconomics Chapter 9 World Price the price of a good that prevails in the world market for the good country will export will import If the world price of a good is higher than the domestic price a If the world price of a good is lower than the domestic price a country Comparing world price to domestic price can show comparative advantage a country that has a lower domestic price has the comparative advantage The Gains and Losses of an Exporting Country When a country accepts the world price the domestic price will rise to that level Supply will be greater than demand the difference will be exported Because trade forces the domestic price up Sellers are better off getting more money Consumers are worse off have to spend more for same good to measure gains and losses look at the changes in CS and PS When a country allows trade and exports domestic producers of the good are better off and domestic consumers 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 The Gains and Losses of an Importing Country When a country accepts world price the domestic price will lower to that level Quantity supplied will be less than quantity demanded so the difference will be imported Because trade forces the domestic price down Sellers are worse off getting less money for the good Consumers are better off have to spend less for the good When a country allows trade and becomes an importer of a good domestic consumers of the good 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 Trade can make everyone better off but it won t always will The Effects of a Tariff Tariff a tax on goods produced abroad and sold domestically With a tariff domestic producers of a good can sell for the world price plus the amount of the tariff Thus the price of the good will rise by the amount of the tariff This reduces qD raises qS The tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade Because the tariff raises the price domestic sellers are better off buyers are worse off and the gov t raises revenue Tariff will decrease total surplus and results in a DWL Gov t revenue is the q of after tariff imports x size of tariff Effects of a tariff Encourages domestic producers to increase production Encourages domestic consumers to reduce consumption Other Benefits of Int l Trade Increased variety of goods Lower costs through economies of scale Some goods can be produced at a low costs only if produced in large quantities called economies of scale Increased competition reduces market power a form of market failure Enhanced flow of ideas ARGUMENTS FOR RESTRICTION TRADE Jobs trade destroys domestic jobs prices fall unemployment happens Yet trade creates jobs in new industries with comparative advantages National Security an industry threatened by trade is vital for national security Sometimes yes but pay attention to who is claiming it industry reps or defense establishment Infant Industry New industries need time to grow This involves predicting winners and can get severely political protection might not be necessary if the industry will be successful in the long run Unfair Competition Different countries are subject to different regulations however gains will outweigh losses Protection as a bargaining chip Trade restrictions can be used as bargaining chip with trading partners Threat may not work
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