chapter 09s

8/9/2019 Chapter 09s

1/71

Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Application:

International Trade

Chapter 9

Copyright 2001 by Harcourt, Inc.

All rights reserved. Requests or permission to ma!e copies o any part o

the

"or! should be mailed to#$ermissions %epartment, Harcourt &ollege $ublishers,


2/71


3/71


International Trade

Who gains and wholoses rom ree

trade among

countries?


4/71


International Trade

What are thearguments that

people use to

ad!ocate traderestrictions?


5/71


Equilibrium Without Trade

"ssume#

" country is isolated rom rest

o the world and produces steel$

%he mar&et or steel consists o the

buyers and sellers in the country$

'o one in the country is allowed to

import or export steel$


6/71


Equilibrium Without Trade...

Priceof Steel

EquilibriumPrice

0 Quantity

of Steel

Equilibrium

quantity

Domestic

supply

Domesticdemand

Producersurplus

Consumersurplus


7/71


Equilibrium Without Trade

(esults#

)omestic price ad*usts to balancedemand and supply$

%he sum o consumer and producer

surplus measures the total beneits thatbuyers and sellers recei!e$


8/71


World Price and ComparativeAdvantage

I the country decides to engage in

international trade, will it be an

importer or exporter o steel?


9/71Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

World Price and Comparative

Advantage

%he eects o ree trade can be shown by

comparing the domestic price o a goodwithout trade and the world priceo the

good$ %he world pricereers to the

pre!ailing price in the world mar&ets$ " country will either be an exporter or an

importer o the good$




Advantage

I a country has a comparati!ead!antage, then the domestic price

will be below the world price, and

the country will be an exporterothe good$




Advantage

I the country does not ha!e a

comparati!e ad!antage, then thedomestic price will be higher than the

world price, and the country will be

an importero the good$

H t I it d d i d it i ht 2001 b H t I


12/71

Priceof Steel

0 Quantityof Steel

Domesticdemand

International Trade in an

Exporting Country...

Domesticsupply

Worldprice

Price aftertrade

Exports

Domestic

quantitydemanded

Domestic

quantitysupplied

Pricebeforetrade




Priceof Steel

0 Quantityof Steel

Worldprice

Domesticdemand

How Free Trade Affect Welfare in

an Exporting Country...

Domesticsupply

Price aftertrade

Pricebeforetrade

A

B

C

D

Exports



Priceof Steel

0 Quantityof Steel

Worldprice

Domesticdemand



Domesticsupply

Price aftertrade

Pricebeforetrade

A

Consumer surplusbefore trade

B

C

Producer surplusbefore trade



Priceof Steel

0 Quantityof Steel

Worldprice

Domesticdemand



Domesticsupply

Price aftertrade

Pricebeforetrade

A

Consumer surplusafter trade

C

B

Producer surplusafter trade

D

Exports



Changes in Welfare from Free Trade:

The Case of an Eporting Countr!

The area " sho#s the increase in total surplus

and represents the gains from trade$

Before Trade After Trade Can!e

Consumer Surplus A " B A # B

Producer Surplus C B " C " D " $B " D%

Total Surplus A " B " C A " B " C " D " D



%o# Free Trade Affects Welfare in

an Eporting Countr!

%he analysis o an exporting country yields

two conclusions#

)omestic producers o the good are

better o, and domestic consumers o

the good are worse o$

%rade raises the economic well+being

o the nation as a whole$



International Trade and the

Importing Countr!

I the world price o steel is lowerthan the domestic price, the

country will be an importer o

steel when trade is permitted$




Importing Countr!

)omestic consumers will want to buysteel at the lower world price$




Importing Countr!

)omestic producers o steel willha!e to lower their output because

the domestic price mo!es to the

world price$




Importing Country...Price

of Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

World

Price

Price after

trade

Domesticquantity

demanded

Domesticquantity

supplied

Price beforetrade

&mports




an Importing Country...Price

of Steel

0 Quantityof Steel

Domesticsupply

World

Price

Domesticdemand

Price after

trade

Price beforetrade

A

B

C

D

&mports





of Steel

0 Quantityof Steel

Domesticsupply

World

Price

Domesticdemand

Price after

trade

Price beforetrade

A


C

B






of Steel

0 Quantityof Steel

Domesticsupply

World

Price

Domesticdemand

Price after

trade

Price beforetrade

A


B D

CProducer surplus

after trade

&mports



Changes in Welfare from Free Trade:

The Case of an Importing Countr!

The area " sho#s the increase in total surplus

and represents the gains from trade$

Before Trade After Trade Can!e

Consumer Surplus A A " B " D " $B " D%

Producer Surplus B " C C # B

Total Surplus A " B " C A " B " C " D " D



%o# Free Trade Affects Welfare in

an Importing Countr!%he analysis o an importing country yields

two conclusions#

)omestic producers o the good are worse

o, and domestic consumers o the good are

better o$

%rade raises the economic well+being o the

nation as a whole because the gains o

consumers exceed the losses o producers$



The &ains and 'osses from

Free International Trade

%he gains o the

winners exceed the

losses o the losers$ %he net change in

total surplus is

positi!e$


28/71


Tariffs

%arisare taxes on imported goods$

%arisraise the price o imported

goods abo!e the world price by the

amount o the tari$


29/71


Price 'ittari(

Worldprice

Price'itout

tari(

The Effect of a Tariff...

Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Tari(

Q)S Q)

D

&mports 'itout tari(

&mports'ittari(

Q*DQ*

S


30/71



Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Worldprice

Q)S Q)

D

Price'itout

tari(


Consumer surplusbefore tari(

roducer surplusbefore tari(


31/71



Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Tari( Worldprice

Q)S Q*

S Q*D Q)

D

Price'itout

tari(

Price 'ittari(


&mports'ittari(

A

Consumer surplus'it tari(

B


32/71



Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Tari( Worldprice

Q)S Q*

S Q*D Q)

D


&mports'ittari(

C+



33/71



Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Tari( Worldprice

Q)S Q*

S Q*D Q)

D


&mports'ittari(

E

Tari( re,enue

Price 'ittari(

Price'itout

tari(


34/71



Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Tari( Worldprice

Q)S Q*

S Q*D Q)

D

Price'itout

tari(

Price 'ittari(


&mports'ittari(

A

B

C E+

D -

Dead'ei!t loss


35/71


Changes in Welfare from a Tariff

eore %ari "ter %ari Change

Consumer -urplus "..C.)./. " . + C.)./.

3roducer -urplus 4 C . 4 . C

4o!ernment (e!enue

'one / . /

%otal -urplus "..C.)./..4 ".. C. /. 4 + ) .

The area "(F sho#s the fall in total surplus and

represents the dead#eight lossof the tariff$


36/71


The Effects of a Tariff

" tari reduces the 5uantity o imports

and mo!es the domestic mar&et closer

to its e5uilibrium without trade$ With a tari, total surplus in the

mar&et decreases by an amount

reerred to as a deadweight loss$


37/71


The Effects of an

Import )uota

"n import 5uotais a limiton the 5uantity o imports$


38/71


Price 'itquota

Worldprice

Price'itout

quota

The Effect of an Import !uota ...

Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Q)S Q*

S Q*D

&mports 'itout quota

&mports'it

quota

Domestic

supply"

&mportSupply

Quota

Equilibrium 'itquota

Equilibrium'itouttrade

Q)D


39/71


The Effects of an

Import )uota

ecause the 5uota raises the domestic price

abo!e the world price, domestic buyers o

the good are worse o, and domestic sellerso the good are better o$

6icense holders are better o because they

ma&e a proit rom buying at the world

price and selling at the higher domestic

price$


40/71


The Effect of an Import !uota ...

Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Worldprice

Q)S Q*

S Q*D Q)

D

Price'itout

quota

Price 'itquota


&mports'it

quota

Domestic

supply"

&mportSupply

QuotaA

B

C E. E.. -+

D


41/71


Changes in Welfare from an

Import )uota

A"B"C"D"E/"E"-"+ A"B"C"E/"E"+

The area "(F sho#s the fall in total surplus and

represents the dead#eight lossof the quota$

Before Quota After Tari( Can!e

Consumer Surplus

Producer Surplus+o,ernment1e,enue

Total Surplus

A"B"C"D"E/"E"- A"B #$C"D"E/"E"-%

+ C"+ "C

2one E/"E "$E/"E%

# $D"-%


42/71


The Effects of an

Import )uota

With a 5uota, total surplus in the

mar&et decreases by an amount

reerred to as a deadweight loss$ %he 5uota can potentially cause an e!en

larger deadweight loss, i a mechanism

such as lobbying is employed to allocatethe import licenses$


43/71


The Effects of Tariffs and

)uotas

I go!ernment sells import licenses or

ull !alue, re!enue e5uals that o

e5ui!alent tari and the results o

taris and 5uotas are identical$


44/71


*oth tariffs and import quotas $ $ $

raise domestic prices$

reduce the welare o domestic

consumers$

increase the welare o domestic

producers$

cause deadweight losses$


45/71


+ther *enefits of International

Trade

Increased !ariety o goods

6ower costs through economies oscale

Increased competition

/nhanced low o ideas


46/71


The Arguments for ,estricting

Trade

7obs

'ational -ecurity Inant Industry

8nair Competition

3rotection as a argaining

Chip


47/71


Trade Agreements

8nilateral# when a country remo!es its

trade restrictions on its own$

9ultilateral#a country reduces its traderestrictions while other countries do the

same$


48/71


-AFTA%he 'orth "merican ree %rade "greement

'"%"is an example o a multilateral tradeagreement$

In 1::;, '"%" lowered the trade barriers

among the 8$-$, 9exico, and Canada$


49/71


&ATT

%he 4eneral "greement on %aris and %rade

4"%%reers to a continuing series o

negotiations among many o the world


50/71


.ummar!

%he eects o ree trade can be determinedby comparing the domestic price without

trade to the world price$

" low domestic price indicates that thecountry has a comparati!e ad!antage in

producing the good and that the country will

become an exporter$

" high domestic price indicates that the rest

o the world has a comparati!e ad!antage in

producing the good and that the country will

become an importer$


51/71


.ummar!

When a country allows trade and

becomes an exporter o a good,

producers o the good are better o, and

consumers o the good are worse o$ When a country allows trade and

becomes an importer o a good,

consumers o the good are better o, andproducers are worse o$


52/71


.ummar!

" tari @ a tax on imports @ mo!es a

mar&et closer to the e5uilibrium

than would exist without trade, and

thereore reduces the gains rom

trade$

Import 5uotas will ha!e eectssimilar to those o taris$


53/71


.ummar!

%here are !arious arguments or

restricting trade# protecting *obs,

deending national security, helping

inant industries, pre!enting unaircompetition, and responding to oreign

trade restrictions$

/conomists, howe!er, belie!e that ree

trade is usually the better policy$


54/71


4raphical(e!iew


55/71


Equilibrium Without Trade...

Priceof Steel

EquilibriumPrice

0 Quantityof Steel

Equilibriumquantity

Domestic

supply

Domesticdemand

Producer

surplus

Consumersurplus



56/71

International Trade in an

Exporting Country...

Priceof Steel

0 Quantityof Steel

Domesticdemand

Domesticsupply

Worldprice

Price aftertrade

Exports

Domesticquantity

demanded

Domesticquantitysupplied

Pricebeforetrade

d f


57/71


How Free Trade AfectsWelare in an Exporting

Country...Priceof Steel

0 Quantityof Steel

Worldprice

Domesticdemand

Domesticsupply

Price aftertrade

Pricebeforetrade

A

B

C

D

Export

s

H F T d Af


58/71




0 Quantityof Steel

Worldprice

Domesticdemand

Domesticsupply

Price aftertrade

Pricebeforetrade

A


B

C


H F T d Af t


59/71




0 Quantityof Steel

Worldprice

Domesticdemand

Domesticsupply

Price aftertrade

Pricebeforetrade

A


C

B

Producer surplusafter trade

D

Export

s

I t ti l T d d th


60/71


International Trade and theImporting Country...

Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

WorldPrice

Price after

trade

Domesticquantity

demanded

Domesticquantity

supplied

Price beforetrade

&mports

H F T d Af t


61/71


How Free Trade AfectsWelare in an Importing


0 Quantityof Steel

Domesticsupply

WorldPrice

Domesticdemand

Price after

trade

Price beforetrade

A

B

C

D

&mports

H F T d Af t


62/71




0 Quantityof Steel

Domesticsupply

WorldPrice

Domesticdemand

Price after

trade

Price beforetrade

A


C

B


H F T d Af t


63/71




0 Quantityof Steel

Domesticsupply

WorldPrice

Domesticdemand

Price after

trade

Price beforetrade

A


B D

CProducer surplus

after trade

&mports


64/71


The Efects o a Tarif...

Price 'ittari(

Worldprice

Price'itout

tari(

Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Tari(

Q)S Q)

D


&mports'ittari(

Q*DQ*

S


65/71



Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Worldprice

Q)S Q)

D

Price'itout

tari(


Consumer surplusbefore tari(



66/71



Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Tari( Worldprice

Q)S Q*

S Q*D Q)

D

Price'itout

tari(

Price 'ittari(


&mports'ittari(

A

Consumer surplus'it tari(

B


67/71



Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Tari( Worldprice

Q)S Q*

S Q*D Q)

D


&mports'ittari(

C+



68/71



Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Tari( Worldprice

Q)S Q*

S Q*D Q)

D


&mports'ittari(

E

Tari( re,enue

Price 'ittari(

Price'itout

tari(


69/71



Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Tari( Worldprice

Q)S Q*

S Q*D Q)

D

Price'itout

tari(

Price 'ittari(


&mports'ittari(

A

B

C E+

D -

Dead'ei!t loss

The Efects o an Import


70/71


The Efects o an Importuota ...

Price 'itquota

Worldprice

Price'itout

quota

Priceof Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Q)S Q*

S Q*D


&mports'it

quota

Domestic

supply"

&mportSupply

Quota

Equilibrium 'it

quota

Equilibrium'itout

trade

Q)D

The Efects o an Import


71/71

The Efects o an Importuota ...

Price

of Steel

0 Quantityof Steel

Domesticsupply

Domesticdemand

Worldprice

Q)S Q*

S Q*D Q)

D

Price'itout

quota

Price 'itquota

&mports'it

quota

Domestic

supply"

&mportSupply

QuotaA

B

C E.

E.. -+

D

chapter 09s

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