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ECON 1000
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Chapter 7 – Global Markets in Actions How Global Markets Work Imports - the goods and services we buy from other countries Exports – the goods and services we sell to people in other countries What Drives International Trade? Comparative advantage drives international trade, fundamental force Comparative advantage – a situation in which a person can perform an activity or produce a good or service at a lower opportunity cost than anyone else.  National comparative advantage – a situation in which a nation can perform an activity or produce a good or service at a lower opportunity cost than any other nation Why Canada Imports T-shirts Without imports, Canada supplies 4 million T-shirts for $8; with imports the world price for t- shirts is $5 so Canada demands 6 million t-shifts while it only supplies 2 million and it imports 4 million a year  Price in Canada falls to world market price  Quantity bought increases; quantity demanded at world price Why Canada exports Regional Jets Without exports, Canada supplies 40 jets for $100 million, with exports Canada supplies 20 jets and produces 70 jets at $150 where they exports 50 jets  Price rises to world price  Quantity demanded decreases; quantity demanded at world price We match the prices to the world market and compare to that product, we see how much we buy or export  If the equilibrium price is lower than the world market , Canada exports  If the equilibrium price is higher than the world market, Canada imports Winners, Losers, and the Net Gain From Trade The winners of trade are the ones whose surplus increases and the loser are the ones that their surplus decreases. Consumer’s gain on imports – lower price, increased purchases  Consumers’ surplus changes to A + B + D o B – the loss of producer surplus o C – a net gain; lower price, increased purchases, gain from imports Producers’ gain from exports – higher price, increased production  Producers’ surplus changes to B + C + D o B – the loss of consumers’ surplus o D – net gain; higher prices, increased production, gain from exports International Trade Restrictions Governments use these tools to influence international trade and protect domestic industries from foreign competition:  Tariffs  Import quotas  Other import barriers  Export subsidies Tariff – a tax on a good that is imposed by importing country when an imported good crosses its international boundary  Provide revenue to the government  Allows the government to satisfy the self-interest of the people who earn their incomes in the import-competing industries The Effects of a Tariff Without a tariff, Canada produces 2 million at $5, imports 4 million at $5, and Canadians buy 6 million t-shifts When tariff is added  The production of t-shirts in Canada increases o Increase of 1.5 million so producer 3.5 million at $7  The imports of t-shirts decreases o Instead of importing 4 million, import 1 million at $7  Canada collects tariff revenue o $2 per 1 million imported (purple rectangle)  The price of t-shirt increases o Increases to world price + tariff, $7  Decrease in purchases o About 2.5 million of a decrease to 4.5 million purchases Tariff on imported goods creates winners, losers, and social loss  Canadian consumer loss – the price of a t-shirt rises and quantity demanded decreases  Canadian producers gain – producers sell their t-shirts for more world price + tariff. Higher price, quantity increases  Society loses, deadweight loss arises – some loss transferred to producer and some t
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