Topic 9- International Trade Flashcards
total trade measure=
GDP
measure of total value placed on eveerything ina country
what happens to supply and demand when there is no international trade
the market equilibrium is solely based on domesitc supply and demand
World price
the prevailing price of a good in the world economy
NO SELLER ACCEPTS LESS THAN THIS AND NO BUYER BUYS MORE THAN THIS
When you compare world price with domestic price, what are you trying to odetermine?
If the country in question has a comparative avantage in this goood
If the domestic price is high?
means that that producing things domestically more expensive (dont have comp adv)
If the domestic price is low?
meas that producing things domestcally is cheap (have comp adv)
Price Takers
countries that take the price as igven to them in the world, they do not influence the price
CAN EITHER EXPORT OR IMPORT
Elasticity of the world price
Perfedctly elastic horizontal line! at this price sllers can sell infiite, below no one wants and above no one would buy!
If world price is above market equilibirum?
They can export goods! because the country can produce goods cheaper at home (equilibrium is BELOW world price) and then they can sell the rest of the goods to other countries
THE SURPLUS AREA!! IT BECOMES THE THIRD PARTY AREA (WORLD!!)
What surplus does exporting affect? (When world price is above market equilibrium)
CONSUMER! because consumers have to buy at world price and if you cant afford it there are international buyers who can!
what does world price represent supply or demand?
GLOBAL DEMAND when talking about exporting!
GLOBAL SUPPLY WHEN TALKING ABOUT IMPORTING
who does…. help?
a) exporting
b) importing
PRODUCERS! higher prices for peoplelto sell at
CONSUEMRS! LOWER PRICES FOR consumers to buy at
what does world price line mean when importing
REPRESENTS WORLD SUPPLY!
Perfectly elastic to represent how people an buy as much as they want at this price, none below, none above
Whehn a country imports goods, who are the winners/losers
CONSUMERS WIN because they get extra surplus (where the shortage would usually be) nbecause they can buy cheaper from inernaitional producers
What does a import world price line look like
LIKE a shortage line!!!!
Can trade make everyone better off?
SINCE there is agreater GAIn from trade then A LOSS! it CANNNN potentially make people better off :) because people can redistribute their wealth,,, but will it?
Tariff
A tax on imported goods
When do tariffs matter?
When the good in question is being importd! If exported because comparative advantage in that good means that producers can sell internationally at world price, NO ONE IS GOING TO BE IMPORTING THAT GOOD
Under free trade? domestic price will equal the world price
YES IT WILL
What do tariffs create?
Deadweight loss <3
How to depict a tariff on a supply and demand diagram?
- It can only happen with imports (solid forizontal line below the market equilibrium)
- Tariff is a tax so draw the tariff line above the world price imports line!!!!
- The rectangle belown the tariff line and above imports line is the government revenue raised from the tariff
What is the government revenue calculated as under the tariff?
Size of the tariff x imports that still happen after the tariff
What is the price after tariff is imposed?
The world price +the amount of the tariff
What is the impact on efficieny that a tariff creates?
DEADWEIGHT LOSS on either side of the tarizz related government revenue !!!
two triangles!
Why does a tariff create dw loss?
- it is a type of tax
2.The left triangle is caused by domestic producers increasing production because the tariff promotes them to meet the demand!
(Deadeweight loss from overproduction)
- The right square is caused by domestic consumers decreasing demand because foreign goods have become more expensive
(Deadweight loss from underconsumption)
Tariff impact on:
-price
-quantity
-welfare of domestic prod and cons
-dw loss?
Price of domestic good is increased
quantity of domestic good is decreased
welfare of cons is lowered (they have to buy more expensive)
welfare of prod is better (bc more incentive for prod to sell at higher price)
dw loss is created bc tariff is TAX
Import quotas are similar to
TAriffs
What is the main difference between import quotas and tariffs?
Govts profit from Tariff
License holders profit from Import Quotas
What are other benefits from trade
- INCREASED COMPETITION
- INCREASED VARIETY
- LOWER COST OF ECONOMIES THROUGH SCALE (some goods produced at low cost of if mass produced)
- CHANGE OF IDEAS!
Arguments against free trade
- The jobs argument
- National security
- infant inndustry
- unfair competition
- protection as a bargaining chip
The jobs argument against free trade
Many say that free trade results in job loss because if internatioonally it is cheaper to produce the good, it wil be imported and local producers willl shut down. JOB LOSS
but workers simply move from one industry that does not have comp adv to the indisutry where the ocutnry is exporting/ has comp adv!!!!
is it cheaper to produe all goods internationally?
even if this is true, trade works on comp adv not abs adv, so you willl always have a comp adv
National security argument against free trade
country could become dependant on foreign imports of guns and steel (which would leave us weak in the middle of war)
SO NO TRADE!
valid argument but often perpetuated by non military personnel, like trump or steel ceos’ who have other interests
AND IF YOU IMPORT STEEL YOU GET IT FOR CHEAPER PRICES, WHICH CONSEQUENTLY!!!! WOULD ALLOW A STOCKPILE OF WEAPONS!!
Infant industry argument!
Arguing that a baby industry should be protected from international trade so it has a chance to grow and prosper!! <33
sucks bc:
1. govt has to choose which to protect
2. supposed to be temporary but often last FOREVER
3. every industry should be held accountbale to market forces; oftne firms have to incur losses for long periods of time and thennn they finally get rich~
Unfair competition argument against free trade!
Complaint that other ocuntries can subsidize production of certain goods, hwich will then be imported into ours for lower price, damaging domestic consumers
THIS NOT FAIR bc those industries are skewed by market forces and this disagvantages are own people
HOWEVERRR this actually benefits our consumers!! <3 so give them thanks that even though their own civilians have to deal with the insane taxation we thriving
Protection as a bargaining chip
threatening to impose tariffs/quotas as a way to bargain with other countries!!
but if the country doesnt back down and refuses to follow the threats our country is in between a rock and a hard place :( either impose tariff and suffer or not be a country of its word!!!
Unliateral
removing trade restrictions on its own
Multilateral
Removing trade restricitons across multiple
in these diagrams w a world price elastic line, what is the domestic price
the INTERSECTION OF SUPPLY AND DEMAND
Autarky
a country that does not trade with others NORTH KOREA
What is the relation between import diagram and the shortage diagram
Quantity Supplies is LESS than Quantity demanded in both,
in a shortage yall jus suffer
in importing, that same shortage area is COVERED by imports!
even though the cost here is greater than the benefit domestically, and the quantity produced domestically decreeases, the quantity consumed domestically increases
AND NO SURPLUS IN A SHORTAGE!! THERE IS SURPLUS HWEN IMPORTING
What is the relationship between surplus and exporting?
The same area! except instead of having to do a sale when there is surplus, they jus sell internationally!!!
qdem<qsupply!!!!
sooooo consumers have to struggle with the prices but they gotta take what they can get!
quantity produced domestically increases, the quantity consumed domestically decreases
NO CONS/PROD SURPLUS IN SURPLUS OF GOODS, BUT YES WHEN EXPORTING
What is the relationship between surplus and exporting?
The same area! except instead of having to do a sale when there is surplus, they jus sell internationally!!!
qdem<qsupply!!!!
sooooo consumers have to struggle with the prices but they gotta take what they can get!
quantity produced domestically increases, the quantity consumed domestically decreasesd
do tariffs increase producer surplus
YES because a lot more consumers jus buy domestically insteead of spendning more
