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Lecture #12 - Oct 26.docx

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Department
Economics
Course
Economics 1021A/B
Professor
Michael Parkin
Semester
Fall

Description
Nicole Wallenburg Economics Mr. Parkin Oct 26, 2011 Economics – Lecture #12 International Trade Restrictions Governments intervene in international trade to protect domestic producers from competition. Governments use four sets of tools:  Tariffs o A tax on a good that is imposed by the importing country when an imported good crosses its international boundary. o Effects  Raises the price, more is supplied, less is imported o Winners, Losers, an Social Loss from a Tariff  Canadian consumers lose because higher price and smaller quantity bought  Canadian producers gain because they can sell them at a higher price so they produce more  Canadian consumers lose more than Canadian producers gain  Society loses: a deadweight loss arises. o Society Loses: A Deadweight Loss  Some of the loss of consumer surplus is transferred to producers and some is transferred to the government as tariff revenue.  But the increase in production costs and the loss from decreased imports is a social loss.  No Tariff Tariff o15 (a) Free trade (a) Free trade Deadweight free trade loss from tariff World price World 7 C D E Imports Tariff with free Producer with tariff trade World surplus expands Quantity (millions of shirts per year Quantity [millions of Tshirts per year] (b) Market with tariff Scan quota Price with quota World World Imports Quota ports with quota with free 8.0 2.0 3.5 4.5 6.0 Quantity (millions of Tshirts per year) Quantity Imillions of Tshirts per year (b) Market with import quota 15 (a) Free trade (a) Free trade Deadweight free trade loss from tariff World price World 7 C D E Imports Tariff with free Producer with tariff trade World surplus expands Quantity (millions of shirts per year Quantity [millions of Tshirts per year] (b) Market with tariff Scan quota Price with quota World World Imports Quota ports with quota with free 8.0 2.0 3.5 4.5 6.0 Quantity (millions of Tshirts per year) Quantity Imillions of Tshirts per year (b) Market with import quota Nicole Wallenburg Economics Mr. Parkin Oct 26, 2011 No Tariff Tariff – CS shrinks – PS expands o  Import quotas o A restriction that limits the maximum quantity of a good that may be imported in a given period.  Ex: food products such as meat, eggs, and dairy products and manufactures such as steel o Effects:  Raises the price, quantity supplied increases, imports decrease o Winners, Losers, and Social Loss from an Import Quota  Canadian consumers lose because price rises  Canadian producers of gain because they get to produce more at a higher price  Importers of T-shirts gain  Society loses: a deadweight loss arises No Import Quota Import Quota o Nicole Wallenburg Economics Mr. Parkin Oct 26, 2011 No Import Quota Import Quota o  Other Import Barriers o Thousands of detailed health, safety, and other regulations restrict international trade  Export Subsidies o An export subsidy is a payment made by the government to a domestic producer of an exported good. o Export subsidies bring gains to domestic producers, but they result in overproduction in the domestic economy and underproduction in the rest of the world and so create a deadweight loss. The Case Against Protectionism Despite the fact that free trade promotes prosperity for all countries, trade is restricted. Two classical arguments for restricting international trade are  The infant-industry argument  The dumping argument The Infant-Industry Argument  The infant-industry argument is that it is necessary to protect a new industry from import competition to enable it to grow into a mature industry that can compete in world markets.  This argument is based on the concept of dynamic competitive advantage, which can arise f
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