INTERNATIONAL TRADE

1
INTERNATIONAL TRADE

• Chapter 9

2
International Trade

• How does international trade affect economic
  well-being?

3
International Trade

• Who gains and who loses from free trade among
  countries?

4
The Principle of Comparative Advantage

• Comparative advantage compares producers of a
  good according to their opportunity costs.
• ä The producer who has the smaller
  opportunity cost of producing a good is said
  to have a comparative advantage in producing
  that good.

5
Determinants of International Trade

• The effects of free trade can be shown by
  comparing the domestic price of a good without
  trade and the world price of the good.
• ä A country will either be an exporter or an
  importer of the good.

6
Equilibrium Without Trade

• Assume
• ä A country that is isolated from rest of the
  world and produces steel.
• ä The market for steel consists of the buyers
  and sellers in the country.

7
Equilibrium Without Trade

• Results
• ä Domestic price adjusts to balance demand
  and supply.
• ä The sum of consumer and producer surplus
  measures the total benefits.

8
Equilibrium Without Trade
Domestic
supply
Consumer
surplus
Producer
surplus
Domestic
demand
0
Quantity
Equilibrium
of Steel
quantity
9
Equilibrium Without International Trade

• When an economy cannot trade in world markets,
  the price adjusts to balance domestic supply and
  demand.

10
Equilibrium Without International Trade

• The sum of consumer and producer surplus measures
  the total benefits that buyers and sellers
  receive from the steel market.

11
An Example of the Impact of International Trade

• If the country decides to engage in international
  trade, will it be an importer or exporter of
  steel?
• Who will gain from free trade in steel and who
  will lose?
• Will the gains from trade exceed the losses?

12
An Example of the Impact of International Trade

• Start by comparing market prices. . .

13
World Price and Comparative Advantage

• If a country has a comparative advantage, then
  the domestic price will be below the world price,
  and the country will be an exporter of the good.

14
World Price and Comparative Advantage

• If the country does not have a comparative
  advantage, then the domestic price will be higher
  than the world price, and the country will be an
  importer of the good.

15
International Trade and the Exporting Country

• If the world price of steel is higher than the
  domestic price, the country will be an exporter
  of steel when trade is permitted.

16
International Trade and the Exporting Country

• Producers of steel will want to sell their steel
  at the world price, hence output will increase,
  and the domestic price will rise.

17
International Trade and the Exporting Country

• As domestic suppliers produce more steel to sell
  in the world market, the domestic price will
  increase to the world price.

18
International Trade and the Exporting Country

• Exports equal the difference between the domestic
  quantity supplied and the domestic quantity
  demanded at the world price.

19
International Trade and the Exporting Country
Domestic
supply
Domestic
demand
0
Quantity
of Steel
20
International Trade and the Exporting Country
Domestic
supply
World
price
Domestic
demand
0
Quantity
of Steel
21
International Trade and the Exporting Country
Domestic
supply
World
price
Domestic
demand
0
Quantity
Domestic
Domestic
of Steel
quantity
quantity
demanded
supplied
22
International Trade and the Exporting Country
23
How Free Trade Affects Welfare in an Exporting
Country

• When domestic prices rise to equal the world
  price, the following occurs
• ä Sellers in the exporting country are better
  off.
• ä Buyers in the exporting country are worse off.

24
How Free Trade Affects Welfare in an Exporting
Country

• Trade raises the economic well-being of the
  country as a whole.
• ä Producer surplus rises by more than consumer
  surplus falls.

25
How Free Trade Affects Welfare in an Exporting
Country
Price
of Steel
Price
after trade
Price
before trade
Domestic
demand
0
Quantity
of Steel
26
How Free Trade Affects Welfare in an Exporting
Country
Price
of Steel
Price
after trade
Price
before trade
Domestic
demand
0
Quantity
of Steel
27
How Free Trade Affects Welfare in an Exporting
Country
Price
of Steel
Consumer surplus before trade
A
Price
after trade
B
Price
before trade
Domestic
demand
0
Quantity
of Steel
28
How Free Trade Affects Welfare in an Exporting
Country
Price
of Steel
Consumer surplus before trade
A
Price
after trade
B
Price
before trade
C
Producer surplus before trade
Domestic
demand
0
Quantity
of Steel
29
How Free Trade Affects Welfare in an Exporting
Country
Price
of Steel
Consumer surplus after trade
A
Price
after trade
Price
before trade
Domestic
demand
0
Quantity
of Steel
30
How Free Trade Affects Welfare in an Exporting
Country
Price
of Steel
Consumer surplus after trade
A
Price
after trade
D
B
Price
before trade
C
Producer surplus after trade
Domestic
demand
0
Quantity
of Steel
31
How Free Trade Affects Welfare in an Exporting
Country
Price
of Steel
A
Price
after trade
D
B
Price
before trade
Total surplus gained after trade
C
Domestic
demand
0
Quantity
of Steel
32
International Trade and the Importing Country

• If the world price of steel is lower than the
  domestic price, the country will be an importer
  of steel when trade is permitted.

33
International Trade and the Importing Country

• Domestic consumers will want to buy steel at the
  lower world price.

34
International Trade and the Importing Country

• Domestic producers of steel will have to lower
  their output until the supply price is equal to
  the world price.

35
International Trade and the Importing Country

• The domestic price falls to equal the world
  price, and domestic consumption increases.

36
International Trade and the Importing Country

• Because domestic production decreases, the
  domestic country becomes an importer of steel.

37
International Trade and the Importing Country

• Imports equal the difference between the domestic
  quantity demanded and the domestic quantity
  supplied at the world price.

38
International Trade and the Importing Country
Domestic
supply
Price
before trade
Domestic
demand
0
Quantity
of Steel
39
International Trade and the Importing Country
Domestic
supply
Price
before trade
World
price
Domestic
demand
0
Quantity
of Steel
40
International Trade and the Importing Country
Domestic
supply
World
price
Domestic
demand
0
Quantity
Domestic
Domestic
of Steel
quantity
quantity
supplied
demanded
41
International Trade and the Importing Country
42
How Free Trade Affects Welfare in an Importing
Country
43
How Free Trade Affects Welfare in an Importing
Country
Domestic
supply
Price
before trade
Price
World
after trade
price
Domestic
demand
0
Quantity
of Steel
44
How Free Trade Affects Welfare in an Importing
Country
Domestic
supply
Price
before trade
Price
World
after trade
price
Domestic
demand
0
Quantity
of Steel
45
How Free Trade Affects Welfare in an Importing
Country
Consumer surplus before trade
Domestic
supply
A
Price
before trade
Price
World
after trade
price
Domestic
demand
0
Quantity
of Steel
46
How Free Trade Affects Welfare in an Importing
Country
Consumer surplus before trade
Domestic
supply
A
Price
before trade
B
Price
World
after trade
price
C
Producer surplus before trade
Domestic
demand
0
Quantity
of Steel
47
How Free Trade Affects Welfare in an Importing
Country
Consumer surplus after trade
Domestic
supply
A
Price
before trade
B
D
Price
World
after trade
price
Domestic
demand
0
Quantity
of Steel
48
How Free Trade Affects Welfare in an Importing
Country
Consumer surplus after trade
Domestic
supply
A
Price
before trade
B
D
Price
World
after trade
price
C
Producer surplus after trade
Domestic
demand
0
Quantity
of Steel
49
How Free Trade Affects Welfare in an Importing
Country
Consumer surplus after trade
Domestic
supply
A
Total surplus gained after trade
Price
before trade
B
D
Price
World
after trade
price
C
Producer surplus after trade
Domestic
demand
0
Quantity
of Steel
50
The Winners From Free Trade

• When a country allows trade and becomes an
  importer of a good, domestic consumers of the
  good are better off.
• ä They pay a lower price.

51
The Losers From Free Trade

• Domestic producers of the good are worse off.
• ä They receive a lower price.

52
Winners and Losers From Free International Trade

• Trade raises the economic well-being of the
  country as a whole.
• ä Consumer surplus rises by more than
  producer surplus falls.

53
Winners and Losers From Free International Trade

• The gains of the winners exceed the losses of the
  losers.

54
Winners and Losers From Free International Trade

• The net change in total surplus is positive.

55
The Effects of a Tariff

• A tariff is a tax on goods produced abroad and
  sold domestically.
• It raises the price of imported goods above the
  world price by the amount of the tariff.

56
The Effects of a Tariff

• Domestic sellers of protected goods are better
  off while domestic buyers of the good are worse
  off.

57
The Effects of a Tariff
Domestic
supply
World
price
Domestic
demand
0
Quantity
QS1
Q
Q
QD1
of Steel
58
The Effects of a Tariff
Consumer surplus without tariff
Domestic
supply
World
Producer surplus without tariff
price
Domestic
demand
0
Quantity
QS1
Q
Q
QD1
of Steel
59
The Effects of a Tariff
Domestic
supply
World
price
Domestic
demand
0
Quantity
QS1
Q
Q
QD1
of Steel
60
The Effects of a Tariff
Domestic
supply
Tariff
World
price
Domestic
demand
0
Quantity
Q
QS2
QS1
Q
Q
QD2
Q
QD1
of Steel
61
The Effects of a Tariff
Domestic
supply
Tariff
World
price
Domestic
demand
0
Quantity
Q
QS2
QS1
Q
Q
QD2
Q
QD1
of Steel
62
The Effects of a Tariff
Consumer surplus with tariff
Domestic
supply
Tariff
World
Producer surplus with tariff
price
Domestic
demand
0
Quantity
Q
QS2
QS1
Q
Q
QD2
Q
QD1
of Steel
63
The Effects of a Tariff
Consumer surplus with tariff
Domestic
supply
Government revenue
Tariff
World
Producer surplus with tariff
price
Domestic
demand
0
Quantity
of Steel
64
The Effects of a Tariff
Consumer surplus with tariff
Domestic
supply
Government revenue
Total surplus lost due to tariff
Tariff
World
Producer surplus with tariff
price
Domestic
demand
0
Quantity
of Steel
65
The Effects of a Tariff

• Like any tax on the sale of a good, a tariff
  distorts incentives and pushes the allocation of
  scarce resources away from the optimum.

66
The Effects of a Quota

• An import quota is a limit on the quantity of a
  good that can be produced abroad and sold
  domestically.

67
Both tariffs and import quotas . . .

• . . . raise domestic prices.
• . . . reduce the welfare of domestic consumers.
• . . . increase the welfare of domestic
  producers.
• . . . cause deadweight losses.

68
The Arguments for Restricting Trade

• Jobs
• National Security
• Infant Industry
• Unfair Competition
• Protection as a Bargaining Chip

69
Conclusion

• Comparing domestic prices with world prices will
  determine which countries are exporters and which
  are importers of a good.

70
Conclusion

• In countries exporting a good, producers are
  better off and consumers are worse off.
• In countries importing a good, consumers are
  better off and producers are worse off.
• The winners gains are greater than the losers
  losses in either case.

71
Conclusion

• Tariffs and quotas . . .
• Raise domestic prices.
• Reduce the welfare of domestic consumers.
• Increase the welfare of domestic producers.
• Cause deadweight losses.

72
INTERNATIONAL TRADE

• End of Chapter 9

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74
Price
of Steel
Domestic
supply
Consumer
surplus
Equilibrium
price
Producer
surplus
Domestic
demand
0
Quantity
Equilibrium
of Steel
quantity
Figure 9-1
75
Figure 9-2
76
Figure 9-3
77
Figure 9-4
78
Figure 9-5
79
Figure 9-6
80
Equilibrium
without trade
Quota
A
B
Equilibrium
with quota
E
C
D
F
E
World

G
price
Domestic
demand
0
QS2
QS1
QD2
QD1
Quantity
of Steel
Figure 9-7