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Chapter 7

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Department
Economics
Course
ECON 1050
Professor
Eveline Adomait
Semester
Fall

Description
Chapter 7: Global Markets in Action October 25, 2010 Global Markets Work -Because we trade with people in other countries, the goods and services that we can buy and consume are no limited by what we can produce -Imports: are the good and services that we buy from people in other countries. -Exports: the goods and services that we sell to people in other countries International Trade Today -Global trade is enormous; in 2010 global exports and imports are projected at $36 trillion, more than half of global production -In 2010, total Canadian exports were $471 billion, which is about 29 percent of the value of Canadian production. -In 2010, total Canadian imports were $484 billion, which is about 30 percent of the value of Canadian production. -Services are 13 percent of total Canadian exports and 18 percent of total Canadian imports. -We also trade intangibles -Almost everything we have has been manufactured somewhere else What Drives International Trade? -The fundamental force that generates trade between nations is comparative advantage. -The basis for comparative trade is divergent opportunity costs between countries. -National comparative advantage is the ability of a nation to perform an activity or produce a good or service at a lower opportunity cost than any other nation.  lower alternative good forgone; not most productive comparative advantage is mutual Example: 1. The opportunity cost of producing a T-shirt is lower in China than in Canada, so China has a comparative advantage in producing T-shirts China has to give up fewer regional jets than Canada -The opportunity cost of producing a regional jet is lower in Canada than in China, so Canada has a comparative advantage in producing regional jets. -Both countries can reap gains from trade by specializing in the production of the good at which they have a comparative advantage and then trading. -Both countries are better off. -Shows Canadian demand and Canadian supply with no international trade. -The price of a T-shirt at $8. -Canadian firms produce 4 million T-shirts a year and Canadian consumers buy 4 million T-shirts a year. -Domestic marginal cost curve -Shows the market in Canada with international trade. -World demand and world supply of T-shirts determine the world price of a T-shirt at $5. -The world price is less than $8, so the rest of the world has a comparative advantage in producing T-shirts. -Supply curve is now a world price curve With international trade, the price of a T-shirt in Canada falls to $5. -At $5 a T-shirt, Canadian garment makers produce 2 million T-shirts a year. -At $5 a T-shirt, Canadians buy 6 million T-shirts a year. -Canada imports 4 million T-shirts a year. Why Canada Exports Regional Jets With no international trade: -The price of a jet at $100 million. -Bombardier produces 40 regional jets a year and Canadian airlines buy 40 a year. With international trade:-World demand and world supply of jets determine the world price of a regional jet at $150 million. -The world price exceeds $100 million, so Canada has a comparative advantage in producing regional jets. -The price of a jet in Canada rises to $150 million. -At $150 million, Canadian airlines buy 20 jets a year. -At $150 million, Bombardier produces 70 regional jets a year. -Canada exports 50 regional jets a year. Winners, Losers, and Net gains from trade •International trade lowers the price of an imported good and raises the price of an exported good. •Buyers of imported goods benefit from lower prices and sellers of exported goods benefit from higher prices. •But some people complain about international competition: not everyone gains. -every time the WTO meets there are complaints mostly because not everyone gains; there are losses -International Trade is a win-win gain -like technological change •Who wins and who loses from free international trade? Gains and Losses from Imports with no international trade:-Total surplus from T-shirts is the sum of the consumer surplus and the producer surplus. with international trade:-The world price is $5 a T-shirt. -Consumer surplus expands from area A to the area A + B + D. -Producer surplus shrinks to the area C; used to be C+B -The area B is transferred from producers to consumers; consumer is better off, producer is worse off -Consumer has increased by less than the producer decreased -Area D is an increase in total surplus. -Area D is the net gain from imports. Gains and Losses from Exports With no international trade:-Total surplus from regional jets is the sum of the consumer surplus and the producer surplus. With international trade:-The world price of a jet is $150 million. -Consumer surplus shrinks to the area A. -Producer surplus expands to the area C + B + D. -The area B is transferred from consumers to producers. -Area D is an increase in total surplus; Area D is the net gain from exports. -Once the economy has adjusted to the international trade there is no gain or losses; the people who once lost will produce something else -Kills poor jobs; and creates good jobs International Trade Restrictions -Governments restrict international trade to protect domestic producers from competition. -Governments use four sets of tools:  Tariffs  Import quotas  Other import barriers  Export subsidies Tariffs -A tariff is a tax on a good that is imposed by the importing country when an imported good crosses its international boundary. For example, the government of India imposes a 100 percent tariff on wine imported from Canada, So when an Indian wine merchant imports a $10 bottle of Ontario wine, he pays the Indian government $10 import duty. -With free international trade, the world price of a T-shirt is $5 and Canada imports 4 million T-shirts a year, Imagine that Canada imposes a tariff of $2 on each T-shirt imported. The price of a T-shirt in Canada rises by $2. Winners, Losers, and Social Loss from a Tariff When the Canadian government imposes a tariff on imported T-shirts:  Canadian consumers of T-shirts lose: -Canadian buyers of T-shirts now pay a higher price (the world price plus the tariff),
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