1. Chapter 9 International Trade

2. The Determinants of Trade
Without international trade, domestic supply & domestic demand meet at an equil. price.
World price = price of a good that prevails in world market
If world price < domestic price, you import;
if world price > domestic price, you export
- Both based on comparative advantage

3. Winners and Losers from Trade
Assumption: the country is small compared to world (price takers)
Example of an Exporting Country

4. Gains & Losses from Trade
Exporting country:
Domestic producers are better off and domestic consumers are worse off
Trade raises economic well-being of a nation; rise in total surplus

5. Gains & Losses of an Importing Country
World price below domestic price leads to imports

6. Winners & Losers Importing Country:
When importing, domestic consumers are better off, and domestic producers are worse off
Trade raises economic well-being of a nation with increased total surplus
Trade policies expands size of economic pie, but also creates winners & losers

7. The Effects of a Tariff Tariff - tax on imports
Tariff raises price of imports above the world price (by size of tariff) and pushes it closer to price that would prevail without trade

8. Effects of a Tariff
By raising price, it reduces the quantity of imports and moves the market closer to equilibrium without trade
Domestic sellers are better off, domestic buyers are worse off
Total surplus has fallen, creating DWL (because a tariff is a tax)

9. Effects of an Import Quota
Limit on the quantity of a good that can be produced abroad and sold domestically
Shifts supply curve to right by size of quota
Leads to exact same result as a tariff except instead of having gov’t revenue, license holders get the surplus

10. Other Benefits of Int’l Trade
Increased variety of goods
Lower costs through economies of scale
Increased competition
Enhanced flow of ideas

11. Arguments for Restricting Trade
Jobs Argument: Trade may eliminate some jobs in industries that you don’t have comparative advantage in, however, you should gain same # of jobs in other industry
National Security Argument: Does it make you too reliant on other countries for industries vital to defend your country?

12. Arguments for Restricting Trade
Infant-Industry Argument: Do new industries need protection? Difficult for gov’t to pick winners
Unfair Competition Argument: Free trade is only ok if everyone plays by same rules
Bargaining Chip Argument: Can use restrictions as threat to get other countries to remove barriers – what if they call our bluff?

13. Trade Agreements
Unilateral agreement: remove trade restrictions on its own
Multilateral agreement: reduce its trade restrictions while other countries do the same (NAFTA, GATT)