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8/2/2019 International Trade Ppt @ Bec Doms Bagalkot
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International Trade
8/2/2019 International Trade Ppt @ Bec Doms Bagalkot
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What determines whether a country imports orexports a good?
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Who gains and who loses from free trade amongcountries?
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What are the arguments that people use to advocatetrade restrictions?
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THE DETERMINANTS OF TRADE Equilibrium Without Trade
Assume:
A country is isolated from rest of the world and producessteel.
The market for steel consists of the buyers and sellers in thecountry.
No one in the country is allowed to import or export steel.
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Figure 1The Equilibrium without International Trade
Copyright 2004 South-Western
Consumersurplus
Producersurplus
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Equilibriumprice
Equilibriumquantity
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The Equilibrium Without International Trade Equilibrium Without Trade
Results:
Domestic price adjusts to balance demand and supply.
The sum of consumer and producer surplus measures thetotal benefits that buyers and sellers receive.
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The World Price and Comparative Advantage If the country decides to engage in international trade,
will it be an importer or exporter of steel?
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The World Price and Comparative Advantage The effects of free trade can be shown by comparing
the domestic price of a good without trade and theworld price of the good. The world price refers to theprice that prevails in the world market for that good.
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The World Price and Comparative Advantage If a country has a comparative advantage, then the
domestic price will be below the world price, and thecountry will be an exporterof the good.
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The World Price and Comparative Advantage If the country does not have a comparative advantage,
then the domestic price will be higher than the worldprice, and the country will be an importerof the good.
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Figure 2 International Trade in an Exporting Country
Copyright 2004 South-Western
Priceof Steel
0Quantityof Steel
DomesticsupplyPriceafter
tradeWorldprice
DomesticdemandExports
Pricebeforetrade
Domesticquantity
demandedDomesticquantitysupplied
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Figure 3 How Free Trade Affects Welfare in an Exporting Country
Copyright 2004 South-Western
DC
BA
Priceof Steel
0 Quantityof Steel
DomesticsupplyPrice
aftertrade World
price
Domesticdemand
Exports
Pricebefore
trade
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Figure 3 How Free Trade Affects Welfare in an Exporting Country
Copyright 2004 South-Western
DC
BA
Priceof Steel
0 Quantityof Steel
DomesticsupplyPrice
aftertrade World
price
Domesticdemand
Exports
Pricebefore
tradeProducer surplusbefore trade
Consumer surplusbefore trade
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How Free Trade Affects Welfare in
an Exporting Country
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THE WINNERS AND LOSERS FROM
TRADE The analysis of an exporting country yields two
conclusions:
Domestic producers of the good are better off, anddomestic consumers of the good are worse off.
Trade raises the economic well-being of the nation as awhole.
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The Gains and Losses of an Importing Country International Trade in an Importing Country
If the world price of steel is lower than the domesticprice, the country will be an importer of steel whentrade is permitted.
Domestic consumers will want to buy steel at the lowerworld price.
Domestic producers of steel will have to lower theiroutput because the domestic price moves to the worldprice.
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Figure 4 International Trade in an Importing Country
Copyright 2004 South-Western
Priceof Steel
0 Quantity
Priceafter
trade
Worldprice
of Steel
Domesticsupply
DomesticdemandImports
Domesticquantitysupplied
Domesticquantity
demanded
Pricebeforetrade
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Figure 5 How Free Trade Affects Welfare in an Importing Country
Copyright 2004 South-Western
C
B DA
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Priceafter trade
Worldprice
Imports
Pricebefore trade
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Figure 5 How Free Trade Affects Welfare in an Importing Country
Copyright 2004 South-Western
C
BA
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Priceafter trade
Worldprice
Pricebefore trade
Consumer surplusbefore trade
Producer surplusbefore trade
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Figure 5 How Free Trade Affects Welfare in an Importing Country
Copyright 2004 South-Western
C
B DA
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Priceafter trade
Worldprice
Imports
Pricebefore trade
Producer surplusafter trade
Consumer surplusafter trade
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How Free Trade Affects Welfare in
an Importing Country
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THE WINNERS AND LOSERS FROM
TRADE How Free Trade Affects Welfare in an Importing
Country The analysis of an importing country yields two
conclusions:
Domestic producers of the good are worse off, and domesticconsumers of the good are better off.
Trade raises the economic well-being of the nation as a whole
because the gains of consumers exceed the losses ofproducers.
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THE WINNERS AND LOSERS FROM
TRADE The gains of the winners exceed the losses of thelosers.
The net change in totalsurplus is positive.
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The Effects of a TariffAtariffis a tax on goods produced abroad and sold
domestically.
Tariffs raise the price of imported goods above theworld price by the amount of the tariff.
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Pricewith tariff Tariff
Importswithout tariff
Equilibriumwithout trade
Pricewithout tariff WorldpriceImports
with tariffQSQS QD QD
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Importswithout tariff
Equilibriumwithout trade
Pricewithout tariff Worldprice
QS QD
Producersurplusbefore tariff
Consumer surplusbefore tariff
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
A
B
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Pricewith tariff Tariff
Importswithout tariff
Equilibriumwithout trade
Pricewithout tariff WorldpriceImports
with tariffQSQS QD QD
Consumer surpluswith tariff
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
C
G
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Pricewith tariff Tariff
Importswithout tariff
Equilibriumwithout trade
Pricewithout tariff Worldprice
QSImports
with tariffQS QD QD
Producersurplusafter tariff
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
E
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Pricewith tariff Tariff
Importswithout tariff
Pricewithout tariff Worldprice
QSImports
with tariffQS QD QD
Tariff Revenue
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Figure 6 The Effects of a Tariff
Copyright 2004 South-Western
C
G
A
ED F
B
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Pricewith tariff Tariff
Importswithout tariff
Pricewithout tariff WorldpriceImports
with tariffQSQS QD QD
Deadweight Loss
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The Effects of a Tariff
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The Effects of a TariffA tariff reduces the quantity of imports and moves the
domestic market closer to its equilibrium withouttrade.
With a tariff, total surplus in the market decreases byan amount referred to as a deadweight loss.
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The Effects of an Import QuotaAn import quota is a limit on the quantity of a good
that can be produced abroad and sold domestically.
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Figure 7 The Effects of an Import Quota
Copyright 2004 South-Western
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticsupply
+Import supply
Domesticdemand
Isolandianprice with
quota
Importswithout quota
Equilibriumwith quota
Equilibriumwithout trade
Quota
Importswith quota
QD
WorldpriceWorldprice
Pricewithout
quota=
QS QDQS
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The Effects of an Import Quota Because the quota raises the domestic 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 aprofit from buying at the world price and selling at thehigher domestic price.
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Figure 7 The Effects of an Import Quota
Copyright 2004 South-Western
A
E'
C
B
GD E" F
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticsupply
+Import supply
Domesticdemand
Isolandianprice with
quota
Importswithout quota
Equilibriumwith quota
Equilibriumwithout trade
Quota
Importswith quota
QD
WorldpriceWorldprice
Pricewithout
quota=
QS QDQS
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The Effects of an Import Quota
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The Effects of an Import QuotaWith a quota, total surplus in the market decreases by
an amount referred to as a deadweight loss.
The quota can potentially cause an even largerdeadweight loss, if a mechanism such as lobbying isemployed to allocate the import licenses.
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The Lessons for Trade Policy If government sells import licenses for full value,
revenue equals that of an equivalent tariff and theresults of tariffs and quotas are identical.
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The Lessons for Trade Policy Both tariffs and import quotas . . .
raise domestic prices.
reduce the welfare of domestic consumers.
increase the welfare of domestic producers.
cause deadweight losses.
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The Lessons for Trade Policy Other Benefits of International Trade
Increased variety of goods
Lower costs through economies of scale
Increased competition
Enhanced flow of ideas
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THE ARGUMENTS FOR
RESTRICTING TRADEJobs National Security
Infant Industry Unfair Competition
Protection-as-a-Bargaining Chip
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CASE STUDY: Trade Agreements and the World
Trade Organization Unilateral: when a country removes its trade
restrictions on its own.
Multilateral: a country reduces its trade restrictionswhile other countries do the same.
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CASE STUDY: Trade Agreements and the World
Trade Organization NAFTA
The North American Free Trade Agreement (NAFTA) isan example of a multilateral trade agreement.
In 1993, NAFTA lowered the trade barriers among theUnited States, Mexico, and Canada.
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CASE STUDY: Trade Agreements and the World
Trade Organization GATT
The General Agreement on Tariffs and Trade (GATT)refers to a continuing series of negotiations among
many of the worlds countries with a goal of promotingfree trade.
GATT has successfully reduced the average tariff amongmember countries from about 40 percent after WWII to
about 5 percent today.
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Summary
The effects of free trade can be determined bycomparing the domestic price without trade to theworld price.
A low domestic price indicates that the country has acomparative advantage in producing the good and thatthe country will become an exporter.
A high domestic price indicates that the rest of the
world has a comparative advantage in producing thegood and that the country will become an importer.
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Summary
When a country allows trade and becomes an exporterof a good, producers of the good are better off, andconsumers of the good are worse off.
When a country allows trade and becomes an importerof a good, consumers of the good are better off, andproducers are worse off.
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Summary
A tariffa tax on importsmoves a market closer tothe equilibrium than would exist without trade, andtherefore reduces the gains from trade.
Import quotas will have effects similar to those oftariffs.
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Summary
There are various arguments for restricting trade:protecting jobs, defending national security, helpinginfant industries, preventing unfair competition, and
responding to foreign trade restrictions. Economists, however, believe that free trade is usually
the better policy.