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Chapter 7.docx

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Department
Economics
Course
Economics 1021A/B
Professor
Brendan Murphy
Semester
Fall

Description
Chapter 7: Global Markets in Action Because we trade with people in other countries, the goods and services that we can buy and consume are not limited by what we can produce. If we didn’t trade, we would have to produce on our within the PPF..trade allows us to escape the boundaries and consume where previously was unattainable Imports are the good and services that we buy from people in other countries Exports are the goods and services we sell to people in other countries (we export to be able to buy imports) Goods account for more importing and exporting than services What drives international trade? The fundamental force that generates trade between nations is comparative advantage. The basis for comparative trade is divergent opportunity costs between countries (oranges in Florida compared to growing oranges in Canada). National comparative advantage: the ability of a nation to perform an activity or produce a good at a lower opportunity cost than any other nation. If Canada sold t-shirts at $8 (domestic equilibrium price), and the world price was $5: Canadian production of shirts decreases (where world price line meets supply curve) and quantity of shirt demanded increases (where world price line meets demand curve) Winners, Losers, and the Net Gain from Trade Gains and Losses from Imports Producer surplus is the area between the demand curve and the world price.. Winners: consumers Losers: producers (Area D is an increase in total surplus and net gain from imports) Gains and Losses from Exports Consumer surplus is the area between the supply curve and the world price.. Winners: producers Losers: consumers (Area D is an increase in total surplus and net gain from exports) International Trade Restrictions Governments restrict international trade to protect domestic producers from competition with four sets of tools: 1. Tariffs: a tax on a good that is imposed by the importing country when an imported good crosses its international boundary Winners, Losers, and Social Loss from a Tariff When a tariff is imposed:  Canadian consumers lose (higher price, less demanded..decrease consumer surplus)  Canadian producers gain (higher price, produce more shirts..increase producer surplus)  Canadian consumers lose more than Canadian producers gain (consumer surplus decreases and producer surplus increases..price of tariff determines what goes up/down more)  Society loses: a deadweight loss arises (some loss of consumer surplus is transferred to the government as tariff revenue but the increase in production and the loss from decreased imports is a social loss) The tariff creates a social loss (deadweight loss) equal to area C+E 2. Import quota: a restriction that limits the maximum quantity of a good that may be imported in a given period Winners, Losers, and Social Loss form an Import Quota When the Canadian government imposes an import tariff on imported goods:  Canadian consumers lose  Canadian producers gain  Importers gain  Society loses: a deadweight loss arises Supply curve shifts out and the supply increases by the quota (ex. Canadian produce 5 million, quota is 1 million so therefore 6 million supplied) The quota creates a social loss (deadweight loss) equal to area C+E Only difference between this and a tariff is that government doesn’t profit (middle square) and that producers gain 3. Other Import Barriers: thousands of detailed health,
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