ECON 200 Lecture Notes - Lecture 7: Trade Restriction, Market Failure, Comparative Advantage

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9 Feb 2017
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January 31, 2017
Why Trade?
We assume it will make us better off
Ricardo
We inherit differences and we have inequalities trade
Relatively better comparative advantage
Smith
We are all the same, but we are natural born traders
Division of labor/ specialization
Technology change will increase production
Ex) Manufacturing output high, manufacturing workers low
Trade Policy: why & how it works?
P US Supply
P(U.S.)
Price w/ tariff P
World price P
US Demand
Q2 Q4 Q1 Q5 Q3 Q
Where world price intersects US supply, US firms produce less
It matters if the constraint is binding or not
Difference between Q2 and Q3 = IMPORTS (because of shortage)
Economics of Tariffs (Tax on imports) higher prices
Q5 Q4 < Q3 Q2 LESS DEMADN FOR IMPORTS
Consumer always loses (pays more) with any trade restriction
Bhagwati’s Theore:
Should we use trade policy to correct market failures?
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