Application: International trade

1
Chapter 9

• Application International trade

2
Outline

• Trade can make everyone better off
• Principle of comparative advantage
• Gains and losses from trade
• Effects of a tariff and import quota on trade
• Implications for trade policy
• Arguments for restricting trade

3
Recap Gains from Trade

• The gains from trade are less obvious when one
  person/country is better at producing both goods.
  
• Principle of absolute advantage compares
  producers of a good according to their
  productivity
• Principle of comparative advantage compares
  producers of a good according to their
  opportunity cost
• With trade, both countries can produce more of
  one commodity and consume more of both
  commodities (founded upon principle of
  comparative advantage)

4
Gains from Trade

• It is impossible for a producer to have a
  comparative advantage in the production of both
  the goods. Why?
• If two producers have different opportunity costs
  they gain from trade as the price of the good
  they buy is less than their opportunity cost for
  that good

5
Interdependence and the gains from trade

• To summarize
• Comparative advantage Specialization
• Economic well-being Increase in production
• Gains from trade
• Trade

6
The Determinants of Trade

• Equilibrium with out trade
• Economy is closed.
• Domestic supply and domestic demand determine
  equilibrium price.
• Equilibrium with trade
• Principle of comparative advantage involves
  comparison of domestic price and world price for
  the traded good.
• If domestic price is less than world price, then
  the country becomes an exporter of the good.
• If domestic price is greater than world price
  then country becomes and importer of the good.

7
Winners and losers from trade

• Gains and losses of an exporting country
• The country is a price taker in the world
  economy.
• Exports domestic supply at world price- domestic
  demand at world price.
• Increase in domestic producer surplus
• Decrease in domestic consumer surplus
• However trade raises the total surplus in the
  economy

8
Winners and losers from trade

• Gains and losses of an importing country
• The country is a price taker in the world
  economy.
• Imports domestic demand at world price- domestic
  supply at world price.
• Decrease in domestic producer surplus
• Increase in domestic consumer surplus
• However trade raises the total surplus in the
  economy