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Chapter 9

Microeconomics - Chapter 9.docx

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Rita Cossa

Microeconomics – Chapter 9 (International Trade) Comparative Advantage – A country produces a good at a lower opportunity cost than other countries - Gains can be made from trade if countries with comparative advantages trade with each other If Domestic Price (PD) < World Price (P W, country has a comparative advantage in the good and exports If Domestic Price (PD) > World Price (P W, world has a comparative advantage in the good and we import Price Taker – Small countries have no impact on the P WEx. Canada) - When small countries engage in free trade, P W is the only relevant price to them - Domestic sellers wouldn’t accept any less than PWotherwise could sell in P W - Domestic buyers wouldn’t pay any more than PWotherwise could buy at P W Summary of Welfare Effects on Trade Other benefits of International Trade: - Consumers enjoy a variety of goods - Producers achieve lower costs by mass producing for a large market - Market power of domestic firms may decrease due to competition from abroad - Enhances flow of ideas and technology, enhancing the world Opposition to Trade: - Losses are often highly concentrated in a small group of people, who feel them acutely - Gains are spread out throughout a large population who don’t see how the trade benefits them - Losers  More incentive to organize restrictions against trade Tariff – A tax on imports (Ex. Tariff of $10/shirt increases P wWich is $20/shirt to $30/shirt) - Price facing domestic buyers and sellers equals P W T D – Deadweight Loss from the over production of shirts F – Deadweight Loss from the under consumption of shirts Import Quota – Quantitative limit on imports of a good (Similar to Tariffs) - Tariffs create revenue for the government, but a quota creates revenue for the foreign producers of the goods (They can sell them at a higher price, due to cap) - Governments do not usually sell licenses to import goods to make revenue Arguments for Restricting Trade: The Job Argument – Trade
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