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Lecture 8

ECON 20A Lecture 8: Lecture 8

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University of California - Irvine
William Branch

Lecture 8 I. International Trade and Efficiency a. Main Idea i. Mankiws Principle: international trade can make everyone better off ii. Illustrate social benefits to international trade not shared equally iii. Tariffs make society worse off b. Efficiency c. Example i. Imagine that the US manufactures smart phones. But government bans imports of smart phones ii. US equilibrium price of smart phones higher than world price iii. China also manufactures smart phones. Chinas equilibrium price is below the world price iv. Note: 1. China has comparative advantage, relative to US, in producing smart phones v. Graph 1. At the world price, which is lower than the domestic price for the US, the US is importing because the demand is greater than the supply at the world price. This increases the Consumer surplus. 2. Producer surplus is decreased because domestic producers are selling at a lower price and they are not selling as many 3. When quantity supplied at world price is greater than quantity demanded, there are exports d. US is better off by opening up to trade in smart phones i. US consumers better off by purchasing more smart phones, at lower price ii. US sellers worse off by selling fewer phones, at lower price iii. On balance, US as a society better off e. China is better off by opening up to trade in smart phones i. Chinese consumers worse off by purchasing fewer smart phones, at higher price ii. Chinese sellers better off by selling more phones, at higher price. iii. On balance China as a society is doing better f. Free Trade can benefit everyone i. Clearly, there are winners and losers ii. Society as a whole benefits iii. SO we just need a mechanism e.g. taxes + transfers to redistribute some of the gains from the winners to the losers iv. Real world: political and practical limits on redistributing gains from trade II. Imposing a Tariff Creates a Deadweight Loss a. Now suppose the US government imposes a tariff (tax) on imported smart phones b. Brings equilibrium closer to the notrade equilibrium deadweight loss
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