Equilibrium without Trade
When an economy cannot trade in world markets, the price adjusts to balance domestic supply and demand. Consumer and producer surplus at equilibrium without trade.
World Price
the price of a good that prevails in the world market for that good
How do you tell whether a country will import or export a good?
-If the world price of a good is higher than the domestic price, the country will export the good.
-If the world price of a goods lower than the domestic price, then the country will import the good.
How does the domestic price reflect the opportunity cost?
-It tells us how much a person must give up to obtain one unit of that good.
-If the domestic price is low, the cost of producing the good is low.
-If the domestic price is high, then the cost of producing the good is high.
What can we determine by comparing world and domestic price before trade?
-We can determine whether a country is better or worse at producing goods than the rest of the world.
When trade is allowed by a country what happens with sellers products?
-The domestic price rises of that good to equal the world price. No seller of a good would accept less than the world price, and no buyer would pay more than the world price.
Exporting Country
-Domestic equilibrium price before trade is below the world price
Importing Country
-Domestic equilibrium price before trade is above world price
What can trade do for everyone?
-It can make everyone better off
-Gains of the winners exceed the losses of the losers
Tariff
-Tax on goods produced abroad and sold domestically
Free Trade
domestic price equals the world price
Tariff on Imports
reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade.
Effects on Tariff (Before)
Domestic Price equals world price
Effects on Tariff (After)
The domestic price exceeds the world price (is used to tax imports and reduce the quantity coming in which moves the market closer to equilibrium)
Other Benefits of International Trade
-Increased variety of goods
-Lower costs through economies of scale
-Increased competition
-Enhanced flow of ideas
Total surplus (with international trade)
Consumer surplus + Producer Surplus + Government Revenue
Dead Weight Loss
-Losing surplus: consumer and producer surplus
-Usually caused by taxes
Jobs Argument
-Opponents of free trade often argue that trade with other countries destroys domestic jobs
-Yet it free trade creates and destroys jobs at the same time
-Workers can move from one industry to another industry which that country has a comparative advantag
National Security Argument
If a country becomes dependent on materials from other countries and the countries go to war, the foreign supply is interrupted. The country that imports goods for war might not be able to defend itself because the other countries are not trading material
Infant-Industry Argument
New industries sometimes argue for temporary trade restrictions to help them get started. After a period of protection, these industries will mature and be able to compete with foreign firms.
Unfair Competition Argument
A common argument that free trade is desirable only if all countries play by the same rules. If firms in different countries are subject to different laws and regulations, then its unfair to except the firms to compete in the international marketplace.
Protection as a Bargaining Chip Argument
Many policy makers claim to support free trade but, at the same time, argue that trade restrictions can be useful when we bargain with our trading partners. They claim that the threat if a trade restriction can help remove a trade restriction already impo
WTO
-World Trade Organization (established 1995)
-The functions of the WTO are to administer trade agreements, provide a forum for negotiations, and handle disputes among member countries.
NAFTA
-North American Free Trade Agreement (1993)
-Lowered trade barriers between US, Canada, and Mexico
GATT
-General Agreement on Tariffs and Trade (WWII)
-A continuing series of negotiations among many of the world's countries with the goal of promoting free trade
-The rules established under GATT are now enforced by WTO
Multilateral vs. Unilateral Speech
One advantage is it has the potential to result in freer trade than a unilateral approach because it can reduce trade restrictions abroad as well as at home. If International negotiations fail, however, the result could be more restricted trade than under