WEEK 4 - Chapter 9: International Trade (Application) Flashcards
What is the world price?
The price of a good that prevails in the world market for that good.
What is an import quota?
A limit on the quantity of a good produced abroad that can be sold domestically.
An import quota has effects that are similar to those of a tariff. Under a quota, however, the holders of the import licences receive the revenue that the government would collect with a tariff.
Effects of an import quota.
An import quota, like a tariff, reduces the quantity of imports and moves a market closer to the equilibrium that would exist without trade.
Total surplus falls by an amount equal to area D + F. These two triangles represent the deadweight loss from the quota.
In addition, the import quota transfers E’ + E” to whoever holds the import licences.
How can the effects of free trade be determined?
The effects of free trade can be determined by comparing the domestic price without trade with the world price.
A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter.
A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer.
Allowing trade.
When a country allows trade and becomes an exporter of a good, producers of the good are better off and consumers of the good are worse off.
When a country allows trade and becomes an importer of a good, consumers are better off and producers are worse off. In both cases, the gains from trade exceed the losses.
