Date post: | 12-Jan-2016 |
Category: |
Documents |
Upload: | adela-dixon |
View: | 217 times |
Download: | 1 times |
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade
Chapter 9
Copyright (c) 1999 Harcourt Brace & Company, Canada, Ltd. All rights reserved.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade
How does international trade affect economic well-being?
Who gains and who loses from free trade among countries?
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Overview
The Determinants of Trade The Winners and Losers From
Trade The Welfare Effects of a Tariff The Arguments for Restricting
Trade
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Chapter 3: The Principle of Comparative Advantage
Trade can benefit everyone in a society because it allows people to specialize
in activities in which they have a comparative advantage.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
The Principle of Comparative Advantage
Comparative Advantage describes the comparison among producers of a good according to their opportunity cost. The producer who has the smaller
opportunity cost of producing a good is said to have a comparative advantage in producing that good.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Determinants of International Trade
The effects of international trade are shown as the difference between the domestic price of a good without trade and the world price of a good.
A country will either be an exporter of the good or an importer of the good.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Determinants of International Trade International trade
issues are no different from trading as it applies to
individuals within a community and
between provinces and regions within
a country.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Equilibrium without Trade
Assume:– A country that is isolated from the rest of
the world and produces tomatoes.
– The market for tomatoes consists of the buyers and sellers of the country.
– Domestic Price adjusts to balance Demand and Supply.
– The sum of consumer and producer surplus measures the total benefits.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Equilibrium Without TradeDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Equilibrium Without TradeDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
Consumer Surplus
Producer Surplus
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Equilibrium Without Trade
When an economy cannot trade in world markets, the price adjusts to equilibrate domestic supply and demand.
The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive from the tomato market.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Impacts of International Trade
If the country decides to engage in international trade will it be an importer or exporter of tomatoes?
Who will gain from free trade in tomatoes and who would lose?
Would gains from trade exceed losses?
Start by comparing market prices. . .
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Determinants of International Trade
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.
If the rest of the world has a comparative advantage, then the domestic price will be higher than the world price and the country will be an importer of the good.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - Exporter
If the world price of tomatoes is higher than the domestic price, the country would be an exporter of tomatoes, when trade is permitted.
Producers of tomatoes will want to sell their tomatoes at the world price, hence output would increase and domestic price would rise.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - ExporterDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - ExporterDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - Exporter
As domestic suppliers produce more tomatoes and sell some of the
additional output in the world market, the domestic price will increase to the
world price.
The domestic country becomes an
Exporter!
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - Exporter
The difference between domestic demand at the world price and domestic production is the amount exported!
It can be determined, graphically, that,Exports will result in a net gain in surplus (welfare).
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - ExporterDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - ExporterDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
QuantityExported!
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - ExporterDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Net Gainin Surplus!
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - Importer If the world price of tomatoes is lower
than the domestic price, the country would be an importer of tomatoes, when trade is permitted.– Consumers will want to buy the lower
priced tomatoes at the world price. Producers of tomatoes will have to
lower their output until the supply price is equal to the world price.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - ImporterDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - ImporterDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - Importer
As a result of a lower world market price, the quantity demanded by the
domestic consumers will increase but the domestic production decreases,
hence
the domestic country becomes an
Importer!
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - Importer
The difference between domestic demand at the world price and domestic production is the amount imported!
It can be determined, graphically, that,Imports will result in a net gain in surplus (welfare).
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - ImporterDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - ImporterDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
AmountImported!
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
International Trade Example - ImporterDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Net Gainin Surplus!
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Overview
The Determinants of Trade The Winners and Losers From
Trade The Welfare Effects of a Tariff The Arguments for Restricting
Trade
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Winners and Losers From Free International Trade
When a country allows trade and becomes an exporter of a good, domestic producers of the good are better off. They receive a higher price.
However, domestic consumers of the good are worse off. They pay a higher price.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Winners and Losers From Free International Trade
When a country allows trade and becomes an importer of a good, domestic consumers of the good are better off. They pay a lower price.
However, domestic producers of the good are worse off. They receive a lower price.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Winners and Losers From Free International Trade
Trade raises the economic well-being of the nation.
The net change in total surplus is positive.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Overview
The Determinants of Trade The Winners and Losers From
Trade The Welfare Effects of a Tariff The Arguments for Restricting
Trade
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
The Welfare Effects of a Tariff
A tariff is a tax on imported goods. A tariff raises the price of imported
goods, above the world price by the amount of the tariff.
Domestic suppliers of the tariffed good are gainers while domestic consumers of the good are losers.
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
The Welfare Effects of a TariffDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
The Welfare Effects of a TariffDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
AmountImported
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
The Welfare Effects of a TariffDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Tariff
}
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
The Welfare Effects of a TariffDomestic
Supply
Domestic Demand
Quantity
Pri
ceTomato Market
World Price
Tariff
}
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
The Welfare Effects of a TariffDomestic
Supply
Quantity
Pri
ceTomato Market
Tariff}
ReducedConsumption
IncreasedProduction
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
The Welfare Effects of a TariffDomestic
Supply
Quantity
Pri
ceTomato Market
Tariff}
GovernmentRevenue From
Tariff
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
The Welfare Effects of a TariffDomestic
Supply
Quantity
Pri
ceTomato Market
Tariff}
Deadweight Losses From
Tariff
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
The Welfare Effects of a Tariff Deadweight Losses
Like any tax on the sale of a good, it distorts incentives and pushes the allocation of scarce resources away from the optimum. – Raises domestic prices and encourages more
production.– Higher domestic prices reduces the amount
purchased by domestic consumers.– DWL
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Overview
The Determinants of Trade The Winners and Losers From
Trade The Welfare Effects of a Tariff The Arguments for Restricting
Trade
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Arguments for Restricting Trade
Arguments Against Free Trade Jobs National Security Infant Industry Unfair-Competition Protection-as-a-Bargaining-Chip
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Conclusion...
Economists see the benefits of trade between countries the same way as they see the benefits of trade between provinces, cities and people.
Any individual would have a much lower standard of living if she or he had to produce all of the goods that this individual planned to consume!
Principles of Microeconomics & Principles of Macroeconomics: Ch.9 First Canadian Edition
Overview
The Determinants of Trade The Winners and Losers From
Trade The Welfare Effects of a Tariff The Arguments for Restricting
Trade