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Canada (158,171)
Economics (727)
ECON 1B03 (302)
Chapter 9

Chapter 9

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McMaster University
Usman Hannan

CHAPTER 9: APPLICATION – INTERNATIONAL TRADE The Determinants of Trade The Worlds Price and Comparative Advantage - world price: the price of a good that prevails in the world marked for that good (i.e. how much is it everywhere else?) - if the domestic price exceeds the world price the country is a consumer, an importer (and vise versa) - if the domestic price is low, the cost of producing is low, suggesting the country has a comparative advantage relative to the rest of the world The Winners and Losers From Trade - price takers if the economy is small The Gains and Losses of an Exporting Country - if the domestic equilibrium is below the world price, the price will shift up causing a greater production in goods, and a decreased domestic demand in goods, therefore making the country an exporter - still in equilibrium because now there is another participant in the market - the consumer surplus decreases, producer surplus increases, and total surplus increases - trade rises economic well being as the gains of the winners exceed the losses of the losers The Gains and Losses of an Importing Country - world price is below domestic price, country becomes an importer, market drops to line - perfectly elastic - consumers are better off, producers are worse off, total surplus increases > economy is better - the winners can compensate for the losers loss, but will usually not, making the efficiency greater and the equity smaller - the losses are often highly concentrated over a small group of people (feel the loss directly) - the gains are often spread thinly over a large group of people (barely notice their increase) The Effects of a Tariff - tariff: a tax on goods produced abroad and sold domestically - raises the amount of money consumers buy imported goods for, and allows domestic producers to sell at the world price plus the tariff ( becomes closer to the price without trade) - reduces the amount of imports and encourages domestic interactions - implementing a tariff decreases the surplus of the consumers and increases the surplus of the producers as well as the government revenue - the total surplus decreases an
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