1. 9 Application: International Trade

2. The World Price and Comparative Advantage The effects of free trade can be shown by comparing the _________ price of a good without trade and the _________ ________ of the good. The world price refers to the price that prevails in the world market for that good.

3. The World Price and Comparative Advantage If a country has a ______________ ______________, then the domestic price will be below the world price, and the country will be an exporter of the good.

4. The World Price and Comparative Advantage If the country does not have a comparative advantage, then the domestic price will be higher than the world price, and the country will be an ________________ of the good.

5. Figure 2 International Trade in an Exporting Country Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Domestic supply Price after trade World price Domestic demand ________ Price before trade Domestic quantity demanded Domestic quantity supplied

6. Figure 3 How Free Trade Affects Welfare in an Exporting Country Copyright © 2004 South-Western D C B A Price of Steel 0Quantity of Steel Domestic supply Price after trade World price Domestic demand _________ Price before trade

7. Figure 3 How Free Trade Affects Welfare in an Exporting Country Copyright © 2004 South-Western D C B A Price of Steel 0Quantity of Steel Domestic supply Price after trade World price Domestic demand Exports Price before trade Producer surplus _______ ________ _________ before trade

8. THE WINNERS AND LOSERS FROM TRADE The analysis of an exporting country yields two conclusions: – Domestic producers of the good are _______ ________, and domestic consumers of the good are __________ ______. –Trade raises the economic well-being of the nation as a whole.

9. The Gains and Losses of an Importing Country International Trade in an Importing Country –If the world price of steel is _________ than the domestic price, the country will be an __________ of steel when trade is permitted. –Domestic consumers will want to buy steel at the lower world price. –Domestic producers of steel will have to lower their output because the domestic price moves to the world price.

10. Figure 4 International Trade in an Importing Country Copyright © 2004 South-Western Price of Steel 0 Quantity Price after trade World price of Steel Domestic supply Domestic demand ________ Domestic quantity supplied Domestic quantity demanded Price before trade

11. Figure 5 How Free Trade Affects Welfare in an Importing Country Copyright © 2004 South-Western C B A Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Price after trade World price Price before trade ____________ surplus before trade Producer surplus _________ trade

12. Figure 5 How Free Trade Affects Welfare in an Importing Country Copyright © 2004 South-Western C B D A Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Price after trade World price Imports Price before trade ___________ surplus after trade Consumer surplus _________ trade

13. THE WINNERS AND LOSERS FROM TRADE How Free Trade Affects Welfare in an Importing Country –The analysis of an importing country yields two conclusions: __________ producers of the good are worse off, and domestic consumers of the good are better off. Trade ___________ the economic well-being of the nation as a whole because the gains of consumers exceed the losses of producers.

14. The Effects of a Tariff A ____________ is a tax on goods produced abroad and sold domestically. Tariffs _________ the price of imported goods above the world price by the amount of the tariff.

15. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Price with tariff Tariff Imports without tariff Equilibrium without trade Price without tariff World price I__________ with tariff Q S Q S Q D Q D

16. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Imports without tariff Equilibrium without trade Price without tariff World price Q S Q D _________ __ surplus before tariff Consumer surplus __________ tariff

17. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western A B Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Price with tariff Tariff Imports without tariff Equilibrium without trade Price without tariff World price Imports with tariff Q S Q S Q D Q D ____________ surplus with tariff

18. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western C G Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Price with tariff Tariff Imports without tariff Equilibrium without trade Price without tariff World price Q S Imports with tariff Q S Q D Q D _________ surplus after tariff

19. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western E Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Price with tariff Tariff Imports without tariff Price without tariff World price Q S Imports with tariff Q S Q D Q D Tariff ________

20. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western C G A EDF B Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Price with tariff Tariff Imports without tariff Price without tariff World price Imports with tariff Q S Q S Q D Q D ___________ Loss

21. The Effects of a Tariff A tariff ____________ the quantity of imports and moves the domestic market closer to its equilibrium without trade. With a tariff, total surplus in the market decreases by an amount referred to as a deadweight loss.

22. The Effects of an Import Quota An _______ ________ is a limit on the quantity of a good that can be produced abroad and sold domestically.

23. Figure 7 The Effects of an Import Quota Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Domestic supply Domestic supply + Import supply Domestic demand Isolandian price with quota Imports without quota Equilibrium with quota Equilibrium without trade __________ Imports with quota Q D World price World price Price without quota = Q S Q D Q S

24. The Effects of an Import Quota Because the quota _________ the __________ price above the world price, domestic buyers of the good are worse off, and domestic sellers of the good are better off. License holders are better off because they make a profit from buying at the world price and selling at the higher domestic price.

25. Figure 7 The Effects of an Import Quota Copyright © 2004 South-Western A E' C B G D E" F Price of Steel 0 Quantity of Steel Domestic supply Domestic supply + Import supply Domestic demand Isolandian price with quota Imports without quota Equilibrium with quota Equilibrium without trade ___________ Imports with quota Q D World price World price Price without quota = Q S Q D Q S

26. The Effects of an Import Quota With a quota, __________ surplus in the market decreases by an amount referred to as a ____________ loss. The quota can potentially cause an even larger deadweight loss, if a mechanism such as lobbying is employed to allocate the import licenses.

27. The Lessons for Trade Policy Both tariffs and import quotas... –___________ domestic prices. –________ the welfare of domestic consumers. –increase the welfare of domestic producers. –____________ deadweight losses.

28. CASE STUDY: Trade Agreements and the World Trade Organization _______________ –The North American Free Trade Agreement (NAFTA) is an example of a multilateral trade agreement. –In 1993, NAFTA lowered the trade barriers among the United States, Mexico, and Canada.

29. CASE STUDY: Trade Agreements and the World Trade Organization ______________ –The General Agreement on Tariffs and Trade (GATT) refers to a continuing series of negotiations among many of the world’s countries with a goal of promoting free trade. –GATT has successfully reduced the average tariff among member countries from about 40 percent after WWII to about 5 percent today.