The Gains from International Trade Without international trade, Farmland produces and consumes 15 billion bushels of grain and 8 million cars at point A. The opportunity cost of a car is 9,000 bushels of grain.
The Gains from International Trade Without international trade, Mobilia produces and consumes 18 billion bushels of grain and 4 million cars at point A'. The opportunity cost of a car is 1,000 bushels of grain.
The Gains from International Trade Comparative Advantage Cars are cheaper for Mobilia to produce than for Farmland, because less grain is given up to produce each car. Grain is cheaper for Farmland to produce than for Mobilia because fewer cars are given up to produce each bushel. A country has a comparative advantage in producing a good if it can produce that good at a lower opportunity cost than any other country. Farmland has a comparative advantage in producing grain, and Mobilia has a comparative advantage in producing cars.
The Gains from International Trade With no international trade, Mobilia can produce a car for 1,000 bushels of grain, so at that price, it plans to sell no cars to Farmland. But as the price rises above 1,000 bushels of grain per car the quantity of cars supplied by Mobilia increases.
The Gains from International Trade With no international trade, Farmland can produce a car for 9,000 bushels of grain, so at that price, it plans to buy no cars from Mobilia. But as the price falls below 9,000 bushels of grain per car the quantity of cars demanded by Farmland increases.
The Gains from International Trade Balanced Trade The number of cars exported by Mobilia equals the number of cars imported by Farmland. Farmland pays Mobilia with 12 billion bushels of grain (four million cars multiplied by 3,000 bushels for each car)—Mobilia imports and Farmland exports 12 billion bushels of grain. Trade is balanced. For each country, the value of exports equals the value of imports—4 million cars are worth the same as 12 billion bushels of grain.
International Trade Restrictions The General Agreement on Tariffs and Trade (GATT) is an agreement between nations to have a series of trade negotiations, or “rounds,” to reduce tariffs on international trade. Canada joined GATT in Subsequent rounds of the GATT occurred in the 1960s, late 1970s and 1980s, resulting in gradual decline in the average tariff rate in Canada.
International Trade Restrictions The supply of cars to Farmland decreases because the tariff must be added to the price at which Mobilia is willing to supply a given quantity. The price rises, the quantity falls, and the government collects the tariff revenue.
International Trade Restrictions The supply curve shifts leftward and the vertical distance between the free-trade supply curve and the new supply curve equals the amount of the tariff. The price of a car in Farmland rises. The quantity of cars imported by Farmland decreases. The Farmland government collects tariff revenue. Resources use is inefficient. The value of exports changes by the same amount as the value of imports and trade remains balanced.
International Trade Restrictions The quota limits the quantity that may be imported. At the quota quantity, buyers are willing to pay more than the price that sellers are willing to accept. Importers profit by buying at a lower price than the price at which they sell.
International Trade Restrictions A quota can generate the same price, quantity, and inefficiency as a tariff but with a quota, the importer makes an economic profit equal to what the government receives as tariff revenue with a tariff. A VER is similar to a quota except that the exporter captures the economic profit.
The Case Against Protection Despite the fact that free trade promotes prosperity for all, trade is restricted. It is often argued that international trade should be restricted to Protect national security Protect infant industries Punish dumping None of these arguments bear scrutiny.