International trade 2012

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

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.)

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)

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)

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)

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

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

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)

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)

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)

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)

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)

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

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)

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)

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

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

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

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

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

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

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

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

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