week10 Flashcards
Case of a small country
World price is determined on the world market
Assume Canada is small: therefore, it will take this world price as given
Gains from Trade: Imports
Have a comparative disadvantage:
World price lower than local price
Trade liberalization:
Drop in local production (Q0 to Qs)
Increase in local demand (Q0 to QD)
Imports: QD-Qs
PS reduces
CS increases
Collective welfare increases
Gains from Trade: Exports
Have a comparative advantage
World price greater than local price
Trade liberalization:
Increase in local production (Q0 to Qs)
Decrease in local demand (Q0 to QD)
Exports: Qs-Qd
PS increases
CS decreases
Collective welfare increase
Restrictions on International Trade
limit imports to help local producers
limit exports to help local consumers
Tariff on Imports
Increase in the price of imported goods
Local Price P+t > P
Stimulates local production
Local production increases to X3
Local consumption decreases to X4
New imports: x4-x3
Cs decreases
PS increases
Government tax revenues increases (Imports*tariff)
Welfare loss (2 triangles)
#1: MC>P world
#2: MV > P world
Quotas on Imports
Limit on imports
Local Price P1 > World Price P*
Increase in local production (inefficient)
Decrease in demand
QD = QS + IM
Imports = Quota = X4-X3
Welfare loss (2 triangles)
#1: MV > P*
#2: MC > P*
Subsidy on Imports
Local Price = P* - s
Consumption increases
Production decreases
Imports increases
Impacts of the policy on government = New level of imports * tariff
Welfare loss:
#1: Discourage production of units with:
MC < P*
#2: Stimulate consumption of units wilt:
MV < P*
Tax on Exports
Local price = P* - t
Quantity produced decreases
Quantity consumed increases
EX decreases
Welfare loss:
#1: Consumption of units with : MV < P*
#2: Non-production of units with: MC < P*
Subsidy on Exports
Local price = P* + s
Quantity produced increases
Consumption decreases
EX increases
Welfare loss:
#1: Drop in consumption with: MV > P*
#2: Increase in production with: MC > P*
A country that Imports: tax on production
Local Price = World Price
Supply shift to the left (higher cost)
Production decreases
Consumption is unchanged
Imports increases
Welfare loss
#1: Are not producing units with MC < World P
A country that Imports: subsidy for production
Local price = World price
Supply shift to the right (lower cost)
Production increases
Consumption unchanged
Imports decreases
Welfare loss:
#1: These units should be imported: MC > P world
A country that exports: Tax on production
Local price = World price
Supply shift to the left
Production and EX decrease
Consumption unchanged
Welfare loss:
#1: Are not producing units that can sell at a Price higher than the cost : MC < World P
A country that exports: Subsidy for production
Local Price = World P
Supply shift to the right
Production and EX increase
Consumption unchanged
Welfare loss:
#1: We produce units at a cost higher than the world price: MC > World Price
US - China World trade
What could go wrong when you fight a trade war?
Retaliation
Higher consumer prices
Lost jobs and profits in supply chains
Lost jobs in the value chains
