Application:

InternationalTradeChapter9InternationalTradeWhatdetermineswhetheracountryimportsorexportsagood?InternationalTradeWhogainsandwholosesfromfreetradeamongcountries?InternationalTradeWhataretheargumentsthatpeopleusetoadvocatetraderestrictions?EquilibriumWithoutTradeAssume:Acountryisisolatedfromrest oftheworldandproducessteel.Themarketforsteelconsistsofthe buyersandsellersinthecountry.Nooneinthecountryisallowedto importorexportsteel.EquilibriumWithoutTrade...PriceofSteelEquilibriumPrice0QuantityofSteelEquilibriumquantityDomesticsupplyDomesticdemandProducersurplusConsumersurplusEquilibriumWithoutTradeResults:Domesticpriceadjuststobalancedemandandsupply.Thesumofconsumerandproducersurplusmeasuresthetotalbenefitsthatbuyersandsellersreceive.WorldPriceandComparativeAdvantageIfthecountrydecidestoengageininternationaltrade,willitbeanimporterorexporterofsteel?WorldPriceandComparativeAdvantageTheeffectsoffreetradecanbeshownbycomparingthedomesticpriceofagoodwithouttradeandtheworldpriceofthegood.Theworldpricereferstotheprevailingpriceintheworldmarkets.

Acountrywilleitherbeanexporteroran importerofthegood.WorldPriceandComparativeAdvantageIfacountryhasacomparativeadvantage,thenthedomesticpricewillbebelowtheworldprice,andthecountrywillbeanexporterofthegood.WorldPriceandComparativeAdvantageIfthecountrydoesnothaveacomparativeadvantage,thenthedomesticpricewillbehigherthantheworldprice,andthecountrywillbeanimporterofthegood.PriceofSteel0QuantityofSteelDomesticdemandInternationalTradeinanExportingCountry...DomesticsupplyWorldpricePriceaftertradeExportsDomesticquantitydemandedDomesticquantitysuppliedPricebeforetradeHarcourt,Inc.itemsandderiveditemscopyright?2001byHarcourt,Inc.PriceofSteel0QuantityofSteelWorldpriceDomesticdemandHowFreeTradeAffectsWelfareinanExportingCountry...DomesticsupplyPriceaftertradePricebeforetradeABCDExportsPriceofSteel0QuantityofSteelWorldpriceDomesticdemandHowFreeTradeAffectsWelfareinanExportingCountry...DomesticsupplyPriceaftertradePricebeforetradeAConsumersurplusbeforetradeBCProducersurplusbeforetradePriceofSteel0QuantityofSteelWorldpriceDomesticdemandHowFreeTradeAffectsWelfareinanExportingCountry...DomesticsupplyPriceaftertradePricebeforetradeAConsumersurplusaftertradeCBProducersurplusaftertradeDExportsChangesinWelfarefromFreeTrade:TheCaseofanExportingCountryTheareaDshowstheincreaseintotalsurplusandrepresentsthegainsfromtrade.BeforeTradeAfterTradeChangeConsumerSurplusA+BA-BProducerSurplusCB+C+D+(B+D)TotalSurplusA+B+CA+B+C+D+DHowFreeTradeAffectsWelfareinanExportingCountryTheanalysisofanexportingcountryyieldstwoconclusions:Domesticproducersofthegoodarebetteroff,anddomesticconsumersof thegoodareworseoff.Traderaisestheeconomicwell-being ofthenationasawhole.InternationalTradeandtheImportingCountryIftheworldpriceofsteelislowerthanthedomesticprice,thecountrywillbeanimporterofsteelwhentradeispermitted.InternationalTradeandtheImportingCountryDomesticconsumerswillwanttobuysteelatthelowerworldprice.InternationalTradeandtheImportingCountryDomesticproducersofsteelwillhavetolowertheiroutputbecausethedomesticpricemovestotheworldprice.InternationalTradeandtheImportingCountry...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandWorldPricePriceaftertradeDomesticquantitydemandedDomesticquantitysuppliedPricebeforetradeImportsHowFreeTradeAffectsWelfareinanImportingCountry...PriceofSteel0QuantityofSteelDomesticsupplyWorldPriceDomesticdemandPriceaftertradePricebeforetradeABCDImportsHowFreeTradeAffectsWelfareinanImportingCountry...PriceofSteel0QuantityofSteelDomesticsupplyWorldPriceDomesticdemandPriceaftertradePricebeforetradeAConsumersurplusbeforetradeCBProducersurplusbeforetradeHowFreeTradeAffectsWelfareinanImportingCountry...PriceofSteel0QuantityofSteelDomesticsupplyWorldPriceDomesticdemandPriceaftertradePricebeforetradeAConsumersurplusaftertradeBDCProducersurplusaftertradeImportsChangesinWelfarefromFreeTrade:TheCaseofanImportingCountryTheareaDshowstheincreaseintotalsurplusandrepresentsthegainsfromtrade.BeforeTradeAfterTradeChangeConsumerSurplusAA+B+D+(B+D)ProducerSurplusB+CC-BTotalSurplusA+B+CA+B+C+D+DHowFreeTradeAffectsWelfareinanImportingCountryTheanalysisofanimportingcountryyieldstwoconclusions:Domesticproducersofthegoodareworseoff,anddomesticconsumersofthegoodarebetteroff.Traderaisestheeconomicwell-beingofthenationasawholebecausethegainsofconsumersexceedthelossesofproducers.TheGainsandLossesfrom

FreeInternationalTradeThegainsofthewinnersexceedthelossesofthelosers.Thenetchangeintotalsurplusispositive.TariffsTariffsaretaxesonimportedgoods.Tariffsraisethepriceofimportedgoodsabovetheworldpricebytheamountofthetariff.PricewithtariffWorldpricePricewithouttariffTheEffectsofaTariff...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandTariffQ1SQ1DImportswithouttariffImportswithtariffQ2DQ2STheEffectsofaTariff...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandWorldpriceQ1SQ1DPricewithouttariffImportswithouttariffConsumersurplusbeforetariffProducersurplusbeforetariffTheEffectsofaTariff...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandTariffWorldpriceQ1SQ2SQ2DQ1DPricewithouttariffPricewithtariffImportswithouttariffImportswithtariffAConsumersurpluswithtariffBTheEffectsofaTariff...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandTariffWorldpriceQ1SQ2SQ2DQ1DImportswithouttariffImportswithtariffCGProducersurplusbeforetariffTheEffectsofaTariff...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandTariffWorldpriceQ1SQ2SQ2DQ1DImportswithouttariffImportswithtariffETariffrevenuePricewithtariffPricewithouttariffTheEffectsofaTariff...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandTariffWorldpriceQ1SQ2SQ2DQ1DPricewithouttariffPricewithtariffImportswithouttariffImportswithtariffABCEGDFDeadweightlossChangesinWelfarefromaTariffBeforeTariffAfterTariffChange

ConsumerSurplusA+B+C+D+E+FA+B-(C+D+E+F)

ProducerSurplusGC+G+C

Government

RevenueNoneE+E

TotalSurplusA+B+C+D+E+F+GA+B+C+E+G-(D+F)TheareaD+Fshowsthefallintotalsurplusandrepresentsthedeadweightlossofthetariff.TheEffectsofaTariffAtariffreducesthequantityofimportsandmovesthedomesticmarketclosertoitsequilibriumwithouttrade.Withatariff,totalsurplusinthemarketdecreasesbyanamountreferredtoasadeadweightloss.TheEffectsofan

ImportQuotaAnimportquotaisalimit

onthequantityofimports.PricewithquotaWorldpricePricewithoutquotaTheEffectsofanImportQuota...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandQ1SQ2SQ2DImportswithoutquotaImportswithquotaDomesticsupply+ImportSupplyQuotaEquilibriumwithquotaEquilibriumwithouttradeQ1DTheEffectsofan

ImportQuotaBecausethequotaraisesthedomesticpriceabovetheworldprice,domesticbuyersofthegoodareworseoff,anddomesticsellersofthegoodarebetteroff.Licenseholdersarebetteroffbecausetheymakeaprofitfrombuyingattheworldpriceandsellingatthehigherdomesticprice.TheEffectsofanImportQuota...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandWorldpriceQ1SQ2SQ2DQ1DPricewithoutquotaPricewithquotaImportswithoutquotaImportswithquotaDomesticsupply+ImportSupplyQuotaABCE'E''FGDChangesinWelfarefroman

ImportQuotaA+B+C+D+E’+E”+F+GA+B+C+E’+E”+GTheareaD+Fshowsthefallintotalsurplusandrepresentsthedeadweightlossofthequota.BeforeQuotaAfterTariffChangeConsumerSurplusProducerSurplusGovernmentRevenueTotalSurplusA+B+C+D+E’+E”+FA+B-(C+D+E’+E”+F)GC+G+CNoneE’+E”+(E’+E”)-(D+F)TheEffectsofan

ImportQuotaWithaquota,totalsurplusinthemarketdecreasesbyanamountreferredtoasadeadweightloss.Thequotacanpotentiallycauseanevenlargerdeadweightloss,ifamechanismsuchaslobbyingisemployedtoallocatetheimportlicenses.TheEffectsofTariffsandQuotasIfgovernmentsellsimportlicensesforfullvalue,revenueequalsthatofequivalenttariffandtheresultsoftariffsandquotasareidentical.Bothtariffsandimportquotas...raisedomesticprices.reducethewelfareofdomesticconsumers.increasethewelfareofdomesticproducers.causedeadweightlosses.OtherBenefitsofInternationalTradeIncreasedvarietyofgoodsLowercoststhrougheconomiesofscaleIncreasedcompetitionEnhancedflowofideasTheArgumentsforRestrictingTradeJobsNationalSecurityInfantIndustryUnfairCompetitionProtectionasaBargainingChipTradeAgreementsUnilateral:whenacountryremovesitstraderestrictionsonitsown.Multilateral:acountryreducesitstraderestrictionswhileothercountriesdothesame.NAFTATheNorthAmericanFreeTradeAgreement(NAFTA)isanexampleofamultilateraltradeagreement.In1993,NAFTAloweredthetradebarriersamongtheU.S.,Mexico,andCanada.GATTTheGeneralAgreementonTariffsandTrade(GATT)referstoacontinuingseriesofnegotiationsamongmanyoftheworld’scountrieswithagoalofpromotingfreetrade.GATThassuccessfullyreducedtheaveragetariffamongmembercountriesfromabout40%afterWWIItoabout5%today.SummaryTheeffectsoffreetradecanbedeterminedbycomparingthedomesticpricewithouttradetotheworldprice.Alowdomesticpriceindicatesthatthecountryhasacomparativeadvantageinproducingthegoodandthatthecountrywillbecomeanexporter.Ahighdomesticpriceindicatesthattherestoftheworldhasacomparativeadvantageinproducingthegoodandthatthecountrywillbecomeanimporter.SummaryWhenacountryallowstradeandbecomesanexporterofagood,producersofthegoodarebetteroff,andconsumersofthegoodareworseoff.Whenacountryallowstradeandbecomesanimporterofagood,consumersofthegoodarebetteroff,andproducersareworseoff.SummaryAtariff–ataxonimports–movesamarketclosertotheequilibriumthanwouldexistwithouttrade,andthereforereducesthegainsfromtrade.Importquotaswillhaveeffectssimilartothoseoftariffs.SummaryTherearevariousargumentsforrestrictingtrade:protectingjobs,defendingnationalsecurity,helpinginfantindustries,preventingunfaircompetition,andrespondingtoforeigntraderestrictions.Economists,however,believethatfreetradeisusuallythebetterpolicy.GraphicalReviewEquilibriumWithoutTrade...PriceofSteelEquilibriumPrice0QuantityofSteelEquilibriumquantityDomesticsupplyDomesticdemandProducersurplusConsumersurplusInternationalTradeinanExportingCountry...PriceofSteel0QuantityofSteelDomesticdemandDomesticsupplyWorldpricePriceaftertradeExportsDomesticquantitydemandedDomesticquantitysuppliedPricebeforetradeHarcourt,Inc.itemsandderiveditemscopyright?2001byHarcourt,Inc.HowFreeTradeAffectsWelfareinanExportingCountry...PriceofSteel0QuantityofSteelWorldpriceDomesticdemandDomesticsupplyPriceaftertradePricebeforetradeABCDExportsHowFreeTradeAffectsWelfareinanExportingCountry...PriceofSteel0QuantityofSteelWorldpriceDomesticdemandDomesticsupplyPriceaftertradePricebeforetradeAConsumersurplusbeforetradeBCProducersurplusbeforetradeHowFreeTradeAffectsWelfareinanExportingCountry...PriceofSteel0QuantityofSteelWorldpriceDomesticdemandDomesticsupplyPriceaftertradePricebeforetradeAConsumersurplusaftertradeCBProducersurplusaftertradeDExportsInternationalTradeandtheImportingCountry...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandWorldPricePriceaftertradeDomesticquantitydemandedDomesticquantitysuppliedPricebeforetradeImportsHowFreeTradeAffectsWelfareinanImportingCountry...PriceofSteel0QuantityofSteelDomesticsupplyWorldPriceDomesticdemandPriceaftertradePricebeforetradeABCDImportsHowFreeTradeAffectsWelfareinanImportingCountry...PriceofSteel0QuantityofSteelDomesticsupplyWorldPriceDomesticdemandPriceaftertradePricebeforetradeAConsumersurplusbeforetradeCBProducersurplusbeforetradeHowFreeTradeAffectsWelfareinanImportingCountry...PriceofSteel0QuantityofSteelDomesticsupplyWorldPriceDomesticdemandPriceaftertradePricebeforetradeAConsumersurplusaftertradeBDCProducersurplusaftertradeImportsTheEffectsofaTariff...PricewithtariffWorldpricePricewithouttariffPriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandTariffQ1SQ1DImportswithouttariffImportswithtariffQ2DQ2STheEffectsofaTariff...PriceofSteel0QuantityofSteelDomesticsupplyDomesticdemandWorldpriceQ1SQ1DPricewithouttariffImportswithouttariffConsumersurplusbeforet