Chapter 9 International Trade.docx
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World Price: The price of a good that prevails in the world market for that good.
To decide whether a country should import or export a good one must first look at the
world price in relation to the current equilibrium without trade. If the world price is
higher then the domestic price, a country should export that good, whereas if the
domestic price is lower then the world price they should import said good. This
comparison can determine whether a country has a comparative advantage before trading.
The Gains and Losses of an Exporting Country
In a country where free trade is introduced, the domestic price is going to change to
match the world price. Domestic producers are going to be better off because the price
they are going to be getting for their goods is going to be higher because the price has
gone up to match the world price. On the other hand the domestic consumers are worse
off because they must now pay more than before because they are no longer paying the
domestic price but the world price.
The gains and losses can be measured on the supply and demand curve. The new
consumer surplus is going to fall as the higher price drives down the domestic demand.
The supplier surplus however increases as the domestic consumers are paying more as
well as the new world consumers that’s demand can be represented as perfectly elastic at
the world price. The amount exported is the surplus from the domestic consumers and
the world demand curve. The area of the triangle represented by the exports is the overall
increase in total surplus.
The Gains and Losses of an Importing Country
If a country becomes an importer of goods the new supply curve would be represented as
a perfectly elastic curve at the world price of that good. If a country is an exporter of a
good the consumers are better off because they can buy more of that good at a lower cost.
The suppliers however are not getting as much as before for the same goods and thus
supply less and are worse off. The supplier surplus is going to decrease, now represented
by the area below the world price and above the domestic supply curve. The consumer
surplus is going to increase to add the surplus lost by the suppliers plus the new surplus
that increases total surplus represented by the area above the world price and below the
domestic supply and demand curves.
The Effects of a Tariff
Tariff: A tax on goods produced abroad and sold domestically.
A tariff raises the price of imported goods above the world price by the amount of the
tariff. This benefits the domestic suppliers of a good as they can now sell their goods for
the world price plus the amount of the tariff, thus increasing their surplus. This also
decreases the demand, thus decreasing the consumer surplus. Overall it also decreases
the overall surplus, a deadweight loss.
Other Benefits of International Trade
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