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Globalization and International Trade
Lecture 8 – academic year 2014/15
Introduction to EconomicsFabio Landini
22
What do we do today?
• Lect. 8: the welfare effects of globalization
• Lect. 8: is it convenient to impose a tax on Chinese shoes imported in Europe? If so, convenient for whom?
33
Question of the day
Who made our shoes?
44
Globalization
What’s “globalization”?
Process of growing economic and financial, e.g. exchange of goods and financial activities (assets).
We ask:
• Which are the effects of globalization on welfare?
• Who gain and who looses from the free trade among nations?
55
World exports of goods(Billions US $ x 1000)
02468
1012141618
European Union (15) World
Updating… the crisis
77
Equilibrium in the absence of international exchanges
Economy without international exchanges (“closed”): the price adjusts so as to equalize internal demand and supply.
8
Equilibrium in the absence of exchanges
Price of steel
Equilibrium price
0 Quantity of steelEquilibriumquantity
Internal supply
Internal demand
Consumer surplus
Producer surplus
99
EXAMPLE – Market for steel
Hypotheses:
•A country that is not in contact with the rest of the world and produces steel.
•The market for steel consists of producers and consumers of that country.
Equilibrium in the absence of exchanges
1010
Opening to international trade: questions
If a country opens to international trade, what happens to exporters and importers of steel?
Who gains and who looses from the opening of the market (= globalization)?
Are the gains of some compensated by the losses of the others?
1111
Baseline hypothesis: the country is SMALL in the world market.
Hence: it behaves like consumers and producers under perfect competition.
Take the world price as a given.
The country decides whether to sell or buy steel to/from the world market.
Opening to international trade
1212
World price and comparative advantage
If a country has a “comparative advantage” in the production of a good,
then: internal price < global price
– why? Price= opportunity cost
In this case: the country becomes an exporter of that good
1313
If a country does not have a “comparative advantage”,
then internal price > global price.
In this case: the country becomes exporter of that good
World price and comparative advantage
1414
International trade in an importing country
If global p < internal p,
“once the borders are opened”, the country becomes an importer of steel.
Key question: who do the consumers want to buy from (given that they are free to choose) ?
1515
Price of steelPrice of steel
Price in a closed Price in a closed economyeconomy
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
World priceWorld price
International trade in an importing country
1616
Internal consumers want to buy steel at a lower price.
– For small quantities, the most efficient among the internal producers can satisfy demand
– For larger quantities, the internal producers are too inefficient compared to foreign competitors and imports
International trade in an importing country
1717
Price of steelPrice of steel
Price in a closed Price in a closed economyeconomy
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
World priceWorld price
Internalquantitysupplied
Internalquantitydemanded
Import
International trade in an importing country
1818
Import=
Internal quantity demanded – internal quantity supplied, at the world price.
Internal price until internal p = global p
Internal consumption and internal production i.e., the country becomes an importer of steel.
International trade in an importing country
1919
Price of steelPrice of steel
Price in a closed Price in a closed economyeconomy
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
World priceWorld price
International trade in an importing country
Consumer surplus in a closed economy
AA
Import
2020
Price of steelPrice of steel
Price in a closed Price in a closed economyeconomy
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
International trade in an importing country
Consumer surplus in a closed economy
AA
C
B
World priceWorld priceImport
Produce surplus in aclosed economy
2121
Price of steelPrice of steel
Price in a closed Price in a closed economyeconomy
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
International trade in an importing country
Consumer surplus in a open economy
AA
World priceWorld priceImport
B D
2222
Price of steelPrice of steel
Price in a closed Price in a closed economyeconomy
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
International trade in an importing country
Consumer surplus in a open economy
AA
World priceWorld priceImport
B D
Produce surplus in aopen economy
C
2323
Price of steelPrice of steel
Price in a closed Price in a closed economyeconomy
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
International trade in an importing country
Consumer surplus in a open economy
AA
World priceWorld priceImport
B
Produce surplus in aopen economy
C
Additional surplus in an open economy
D
2424
Gains and losses from free trade
When a country opens its frontiers to free trade becoming an importer, its consumers gain.
They pay a lower price and can buy more.
The national producers, instead, are damaged.
They receive a lower price and sell less units.
2525
Overall, international trade increases the total welfare of the country.
The net variation of total welfare (surplus) is positive
The gains of consumers are greater than the losses of producers.
Gains and losses from free trade
2626
The effects of a custom duty
A custom duty is a tax on a good produced abroad and imported.
A custom duty increases the global price proportionally.
2727
National producers take advantage of the duty, while consumers experience a loss.
The effects of a custom duty
2828
Price of steelPrice of steel
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
Import without Import without dutyduty
World priceWorld price
QQSS11QQ QQQQDD
11
The effects of a custom duty
Price without Price without dutyduty
2929
Price of steelPrice of steel
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
Import without Import without dutyduty
World priceWorld price
QQSS11QQ QQQQDD
11
The effects of a custom duty
Consumer surpluswithout duty
Producer surplus Without duty
Price without Price without dutyduty
3030
Price of steelPrice of steel
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
Import without Import without dutyduty
World priceWorld price
QQSS11QQ QQQQDD
11
Price without Price without dutyduty
The effects of a custom duty
3131
Price of steelPrice of steel
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
Import without Import without dutyduty
World priceWorld price
QQSS11QQ QQQQDD
11
The effects of a custom duty
Price with dutyDuty
QS2 QD
2
Price without Price without dutyduty
3232
Price of steelPrice of steel
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
World priceWorld price
The effects of a custom duty
Price with dutyDuty
QS2 QD
2
Price without Price without dutyduty Import with
duty
QQ QQDD11
3333
Price of steelPrice of steel
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
World priceWorld price
The effects of a custom duty
Price with dutyDuty
QS2 QD
2
Price without Price without dutyduty
QQ QQDD11
Consumer surpluswithout duty
Producer surplus with duty
3434
Price of steelPrice of steel
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
World priceWorld price
The effects of a custom duty
Price with dutyDuty
QS2 QD
2
Price without Price without dutyduty
QQ QQDD11
Consumer surpluswithout duty
Producer surplus with duty
Public revenue
3535
Price of steelPrice of steel
00 Quantity of steelQuantity of steel
Internal supplyInternal supply
Internal demandInternal demand
World priceWorld price
The effects of a custom duty
Price with dutyDuty
QS2 QD
2
Price without Price without dutyduty
QQ QQDD11
Consumer surpluswithout duty
Producer surplus with duty
Net loss due to the dutyNet loss due to the duty
Public revenue
3636
As any other tax, a duty creates a distortion in incentives and affects the optimal allocation of resources
The effects of a custom duty
3737
The argument in favour of restrictions to free trade
• Employment
• National security
• Infant industry protection
• Dumping
• Protectionism as bargaining tool
3838
Hence
Through the comparison between internal price and world price one can identify which countries are exporters and which are importers of a particular good.
3939
Globalization means:
In exporting countries, producers gains, while consumers loose.
In importing countries, consumers gain, while producers loose.
In both cases gains are greater than losses.
4040
Conclusion
The custom duty. . .
•Increases the national price of a good.
•Reduces the welfare of internal consumers
•Increases the welfare of internal producers
•Creates a net loss in terms of welfare