1. International trade
2012

2. Objectives After studying this chapter, you will be able to:
Explain how a country can gain from international trade
Explain how markets enable us to reap the gains from international trade and identify its winners and losers
Explain the effects of international trade barriers
Explain the arguments used to justify trade

3. The Gains from International Trade
Imports are the goods and services that we buy from people in other countries.
Exports are the goods and services we sell to people in other countries.
The key facts are worth emphasising: enormous growth in volume of trade and huge two way trade in manufactures.
Explain that the balance of trade along with the international borrowing and lending that finances it results from spending and saving decisions in Australia and the rest of the world and is independent of the forces that generate the volume of trade, which this chapter covers. (In a micro course, note that this topic gets covered in macro. In a macro course, note that this topic comes in the next chapter.)

4. Markets and the Distribution of Gains and Losses
An import
Australia is an importer in the market for cars
The market for cars without international trade is illustrated in figure 7.3(a)
The market for cars with international trade is illustrated in figure 7.3(b)

5. A Market With Imports 35 30 SA 25 20 15 DA 10 0.5 1.0 1.5
Figure 7.3(a)
Equilibrium without
international trade 35 30 SA 25
Price (thousand of dollars per car)
Price with
no trade 20 15 DA 10
Quantity
Produced and
consumed
0.5
1.0
1.5
Quantity (millions of cars per year)

6. A Market With Imports 35 30 SA 25 20 15 DA 10 0.5 1.0 1.5
Figure 7.3(b)
Equilibrium in a market
with imports 35 30 SA 25
Quantity
Produced
decreases
Price (thousand of dollars per car)
Quantity
Consumed
increases 20
Price
falls
World Price 15
Quantity consumed
Quantity
produced DA 10
Imports
0.5
1.0
1.5
Quantity (millions of cars per year)

7. Benefits of trade 15 b Consumer goods 10 5 a c 0 1 2 3 4 5
Capital goods)

8. Markets and the Distribution of Gains and Losses
Winners and losers in an import market
By comparing consumer surplus and producer surplus with imports and without imports, consumers gain and producers lose

9. Gains and Losses in a Market With Imports
Figure 7.4(a)
Consumer and producer
surplus without
international trade 35
Consumer
surplus 30 SA 25
Price (thousand of dollars per car) 20
Equilibrium with no
international trade
Producer
surplus 15 DA 10
0.5
1.0
1.5
Quantity (millions of cars per year)

10. Gains and losses in a Market With Imports
Figure 7.4(b)
Gains and losses
from imports 35
Consumer
Surplus
expands
Increase in
total surplus
from imports 30 SA 25
Price (thousand of dollars per car) 20
World Price 15 DA
Producer
Surplus
shrinks 10
0.5
1.0
1.5
Quantity (millions of cars per year)

11. Markets and the Distribution of Gains and Losses
An Export
Australia is an exporter in the market for coal because our costs of production are lower that the world price.
Equilibrium without international trade is illustrated in figure 7.5(a)
Equilibrium with international trade is illustrated in figure 7.5(b)

12. A Market With Exports 100 SA 75 50 40 25 DA 100 200 300
Equilibrium without
international trade
100 SA
Price with
no trade 75
Price (dollars per tonne) 50 40
Quantity
Produced and
consumed 25 DA
100
200
300
Quantity (millions of tonnes per year)

13. A Market With Exports 125 100 SA 75 50 40 25 DA DA 100 200 300
Demand
increases
Equilibrium in a
market with exports
Consumption can increase
Decrease, or remain the same
- here it remains the same
Price
rises
100 SA 75
World Price
Quantity
Produced
Price (dollars per tonne) 50 40
Exports 25
Quantity
consumed DA DA
100
200
300
Quantity (millions of tonnes per year)

14. Markets and the Distribution of Gains and Losses
Winners and losers in an export market
We can see who gains and who loses by looking at the changes to consumer surplus and producer surplus
Consumer surplus remains the same while producer surplus increases
Producers gain because they receive higher price, sell more and receive a larger producer surplus

15. Gains and Losses in a Market With Exports
Figure 7.6(a)
Consumer and producer
surplus without international trade
100
Consumer
surplus SA 75
Price (dollars per tonne) 50
Equilibrium with
no international
trade 40
Producer
surplus 25 DA
100
200
300
Quantity (millions of tonnes per year)

16. Gains and Losses in a Market With Exports
Figure 7.6(b)
125
Consumer surplus can increase
decrease, or remain the same
- here it remains the same
The gains and losses
from export
100
Increase in total surplus
From exports = D+E+F A F SA 75
World Price D E B
Price (dollars per tonne) 50 40
Producer
Surplus
expands C 25 DA DA
100
200
300
Quantity (millions of tonnes per year)

17. International Trade Restrictions
Governments restrict international trade to protect domestic producers from competition by using three main tools:
Tariffs
Subsidies
Quotas

18. International Trade Restrictions
A tariff is a tax that is imposed by the importing country when an imported good crosses its international boundary.
A subsidy is a payment made by a government to a domestic producer based on the quantity produced
A quota is a limit on the quantity of a good that may be imported
Today we will explore tariffs and quotas

19. International Trade Restrictions
When Australia imposes a tariff on car imports:
The price of a car in rises.
The quantity of cars imported decreases.
The government collects the tariff revenue.
Producer surplus increases.
Consumer surplus decreases.
Total surplus decreases – a deadweight loss

20. International Trade Restrictions
How subsidies work
A subsidy works just like a tax, but in the opposite direction.
A subsidy shifts the supply curve rightward, lowers the price, increase the quantity, and creates a deadweight loss from overproduction
If a subsidy is granted on an export or an import it changes the amount of international trade

21. Impact of Tariffs Pd Pt Pw Sd D Price g f h i Sw + t e j Sw Quantity aa b q c d

22. Impact of Tariffs (cont.)
Consumption loss
a measure of the benefit lost to consumers that is not captured by other elements in society
Production loss
the value of production lost to society
Deadweight loss
the reduction in the total level of welfare (or real incomes) across society due to tariff protection

23. Impact of Tariffs (cont.)
Effects on foreign producers
income of foreign producers will fall
Government revenue
the government gains by obtaining tariff revenue
tariff revenue is essentially a transfer of income from consumers to government and does not represent any net change in the nation’s economic wellbeing

24. Impact of Quotas Pd PQ Pw Sd Price f i e j g h Sw Dd Quantity a b q ca b q c d

25. Arguments for Protection
Military self-sufficiency argument
Increase domestic employment
Diversification for stability
Infant-industry argument
Cheap foreign labour argument
Anti-dumping
To counter lax environmental standards