A.S 3.2 International Trade

Involves buying and selling goods and services between nations Most trade occurs between firms operating in different countries. Some trade is between government agencies

International Trade Can you think of exports and imports NZ sells and buys? Which countries do you think most of NZ’s trade occurs between? How much influence do you think NZ has on the price in the world market? aspxbusiness.newzealand.com/Economy/ aspx

International Trade NZ is a price taker –A price taker must accept or take the price that is set in the world market. Whether a good is imported or exported depends on where the World price is, in relation to the Domestic product. World price= the price at which a good or service is traded on international markets Domestic Price= The price at which a good or service is traded on home market.

HORIZONTAL WORLD SUPPLY CURVE New Zealand faces a perfectly elastic supply curve for imports set at the world price as the New Zealand market is so small in relation to the output from the world Therefore the overseas suppliers are able to supply as much as New Zealand can buy at the world market price

Exports An export is a product consumed in one country and sold to and consumed in another country. Reasons for exports occurring The World price is higher than the domestic price would be if there was no trade The World provides a larger market than the domestic market. When these reasons occur, trade results in larger revenues for firms than if trade didn’t occur.

New Zealand as a exporter World Price Exports QD NZ QS NZ World Demand curve

New Zealand as a exporter Amount of Exports

Imports An import is a product consumed by one country but produced in another country Reasons why imports occur The world price is lower than what the domestic price would be than if there was no trade The importing country may not have the resources to produce the imported product. Imports enable the standard of living of a nation to be greater than it would otherwise be.

New Zealand as an Importer World Price QDnz QSnz Imports World supply curve

New Zealand as an Importer

Trade and Allocative Efficiency Trade improves allocative efficiency Shown by increased net welfare benefit from both exporting and importing Protectionist policies result in a loss of allocative efficiency and dead weight loss Tariff is a type of protectionist policy. It is a tax on an imported good.

Trade and Allocative Efficiency - Tariffs World price (Zero tariff) QDnzQSnz World Price (Tariff) QDnz’QSnz’ a c

QDnzQDnz’QSnz’ Trade and Allocative Efficiency - Tariffs Consumer surplus Imports Tariff Revenue

Trade and Allocative Efficiency - Tariffs Tariff on imports Increase the price More government revenue Reduce consumer surplus Increase producer surplus Create a dead weight loss Create allocative inefficiency Domestic producers do benefit but consumers and the economy as a whole suffers a net loss Protectionist policies that restrict access of New Zealand exports

IMPORT QUOTA Price Quantity Sd Dd P Pquota QUOTA Qquota An import quota will increase prices. Reduce CS Increase PS Create allocative inefficiency CS PS DWL