Econ 102 Buckley Lesson 9 1 Imports Autarky No trade Production equals No purchases of foreign made goods and no sales of goods to foreigners World Price Price of a good that prevails in the for a good Lesson 09 Note Set Kaldor Improvement A change that improves the welfare of one party enough that the winners would be able the losers and everyone would be better off Summary Opening from autarky to free trade in a good where the world price is lower than the domestic price Causes the quantity supplied domestically to and the quantity demanded domestically to The difference between QD and QS will be The lower price consumer surplus but producer surplus The net effect is that gains from trade Page 1 of 5 Econ 102 Buckley Lesson 9 2 Exports Absolute Advantage Able to produce with a given amount of inputs Comparative Advantage Able to produce at a opportunity cost Lesson 09 Note Set Summary Opening from autarky to free trade in a good where the world price is higher than the domestic price Causes the quantity supplied domestically to and the quantity demanded domestically to The difference between QS and QD will be The higher price producer surplus but consumer surplus The net effect is that gains from trade Opening to free trade from autarky increases gains from trade in both markets where we goods and markets where we goods Page 2 of 5 Econ 102 Buckley Lesson 9 3 Protectionism Tariff A tax on goods produced and sold domestically Lesson 09 Note Set Summary rise Taxing imports causes imports to Deadweight Loss Occurs in two areas DWL from making something with a cost than the price it could have been purchased at DWL from being able to buy something due to the tariff A tariff on an imported good will cause Consumer Surplus to fall and Producer Surplus to Even though there is an increase in Producer Surplus and there is some tax revenue the tariff still introduces deadweight loss Import Quota A on the number of units that can be imported Summary An import quota will prices of a good An import quota has the same effect as a tariff but will not generate any Tariffs and import quotas can protect domestic producers from competition but these policies are extremely costly to Page 3 of 5 Econ 102 Buckley Lesson 9 4 Other Benefits of Free Trade Arguments in Favor of Free Trade Lesson 09 Note Set Trade allows for an increased o Having a variety of goods increases o The fall of the Berlin Wall allowed East Berliners to get Trade allows us to take advantage of o If 1 in 10 000 people have a rare disease then the drug could only be sold to 33 000 people in the US The development cost would be per patient o Trade allows that same drug to be sold to 787 000 people which makes the development cost only per patient Trade makes markets more o Monopolies restrict output to drive price o When firms all over the world compete prices o Firms not only compete with each other by offering better prices they also compete by offering better Trade allows o Farmers in China were able to which destroyed millions of tons a rice per year by using biodiversity research from the U S o Robert Milliken a textile factory own in South Carolina protested against trade with Mexico His factories used Arguments Against Free Trade Free Trade destroys improve wages Imports are o While Free Trade does destroy some jobs it o The net effect of trade on employment is closer to but it can help o The US does import than it exports This is sometimes called the o trade gap However the money comes back to the US in the form of investments called If we import less we export Imports are paid for with o Net Capital Inflow indicates that people in other nations find the US a relatively place to invest Page 4 of 5 Econ 102 Buckley Lesson 09 Note Set Tariffs are necessary for o War disrupts trade o How much trade can prevent war is but more trade can lower the in war Trade is bad for the o Wealthier people tend to about the environment o Trade helps minimize costs Trade can also minimize the environmental costs too Trade mostly benefits the o Access to low priced imported goods is a big help to Trade exploits o Competition between firms wages and working conditions Summary most Americans There are many good things about Many of the arguments against trade have Polls of economists find that 80 to 90 that trade deals have benefits Page 5 of 5