Chapter 7- How Global Markets Work
• imports- goods and services we buy from other countries
• exports- goods and services we sell to people in other countries
International Trade Today
• United States is the world’s largest international trader
• Germany and China rank second and third, lag by a large margin
• in 2008 Canadian exports were $535 billion, imports were $503 billion
What Drives International Trade?
• comparative advantage is the fundamental force that drives international trade
• national comparative advantage as a situation in which a nation
countries gain from international trade
•
Why Canada Imports T-Shirts
• Canada imports T-shirts because the rest of the world has a comparative advantage in
producing T-shirts
• price of a shirt would be $8 and 4 million shirts a year would be produced by Canadian
garment makers and bought by Canadian consumers
• world price is less than $8 a shirt
• Canadian demand curve tells us that at $5 a shirt, Canadians buy 6 million shirts a year
• the Canadian supply curve tells us that at $5 a shirt, Canadian garment makers produce 2
million shirts a year
• to buy 6 million shirts when only 2 million are produced in Canada, we must import shirts
from the rest of the world
Why Canada Exports Regional Jets
• demand curve tells us the quantity of regional jet that airlines in Canada are willing to buy at
various price
• supply curve tells us the quantity of regional jets that Bombardier is willing to sell at various
price
• with no international trade, price would be $100 million and 40 a year would be produced
• world price is $150 million
• at this price, Canadian airlines buy 20 regional jets a year
• at a price of $150 million, Bombardier produces 70 regional jets a year
• quantity produced in Canada minus the quantity purchased by Canadian airlines is the quantity
exported
Winners, Losers and the Net Gain from Trade
• international trade has winners but it also has losers
Gains and Losses from Imports • measure the gains and losses from imports by examining their effect on consumer surplus,
producer surplus and total surplus
• winners are those whose surplus increases and the losers are those whose surplus decreases
• surpluses change when the Canadian market opens to imports
• price in Canada falls to world price
• quantity bought increases to the quantity demanded at the world price and consumer surplus
expands
quantity produced in Canada decreases to the quantity supplied at the world price and producer
•
surplus shrinks
• part of the gain in consumer surplus is a loss of producer surplus- a redistribution of total
surplus
• other part of the increase in consumer surplus is a net gain
increase in total surplus results from the lower price and increased purchases and is the gain
•
from imports
Gains and Losses from Exports
• measure gains and losses from exports by their effect on consumer surplus, producer surplus
and total surplus
• with no international trade, domestic demand and domestic supply determine price and
quantity
• when the good is exported, the price rises to the world price
• quantity bought decreases to the quantity demanded at the world price and the consumer
surplus shrinks
• quantity produced increases to the quantity supplied at the world price and the producer surplus
expands
• part of the gain of producer surplus is a loss in consumer surplus- a redistribution of the total
surplus
• other part of the increase in producer surplus is a net gain
• increase in total surplus results from the higher price and increased production and is the gain
from exports
International Trade Restrictions
• four sets of tolls to influence international trade and protect domestic industries from foreign
competition
Tariffs
• tariff- tax on a good that is imposed by the importing country when an imported good crosses
its international boundary
provide revenue to the government
•
• enable the government to satisfy the self-interest of the people who earn their incomes in the
import-competing industries
• tariffs and other restrictions on free international trade decrease the gains fro trade and are not
in the social interest
THE EFFECTS OF ATARIFF • with a tariff set at $2 per shirt, changes occur
RISE IN THE PRICE OFASHIRT
• to buy a shirt, Canadians must pay the world price plus the tariff
• new domestic price line lies $2 above the world price line
DECREASE IN PURCHASES
• higher price of a shirt brings a decrease in the quantity demanded along the demand curve
INCREASE IN DOMESTIC PRODUCTION
• higher price of a shirt stimulates domestic production
• garment makers increase the quantity supplied
DECREASE IN IMPORTS
• shirt imports decrease by 3 million
• both decrease in purchases and the increase in domestic production contribute to this decrease
in imports
TARIFF REVENUE
• government’s tariff revenue is $2 million
WINNERS, LOSERS,AND THE SOCIAL LOSS FROMATARIFF
• a tariff on an imported good creates winners and losers and a social loss
CANADIAN CONSUMERS OF THE GOOD LOSE
• quantity of shirts demanded decreases
• combination of a higher price and smaller quantity bought decreases consumers surplus- loss to
Canadian consumers
CANADIAN PRODUCERS OF THE GOOD GAIN
Canadian shirt producers are now able to sell their shirts for the world price plus the tariff
•
• at the higher price, the quantity of shirts supplied by Canadian producers increases
• combination of a higher price and larger quantity produced increases producer surplus- gain to
Canadian producers from the tariff
CANADIAN CONSUMERS LOSE MORE THAN CANADIAN PRODUCERS GAIN
• consumer surplus decreases for four reasons: some becomes producer surplus, some is lost in a
higher cost of production, some is lost because imports decrease and some goes to the
government as tariff revenue
SOCIETY LOSES:ADEADWEIGHT LOSS ARISES
• some of the loss of consumer surplus is transferred to producers and some is transferred to the
government
• but the increase in production cost and the loss from decreases imports is transferred to no one:
it is a social loss- a deadweight loss
Import Quotas
• import quota- a restriction that limits the maximum quantity of a good that may be imported in
a given period
• most countries impose quotas on a wide range of items
• enable the government to satisfy the self-interest of the people who earn their incomes in
import-competing industries THE EFFECTS OF AN IMPORT QUOTA
• effects of an import quota are similar to those of a tariff
price rises, quantity bought decreases and the quantity produced in Canada increases
•
• with an import quota of 1 million shirt a year, the Canadian supply curve of shirts becomes the
domestic supply curve plus the quantity that the import quota permits
• price of a shirt rises to $7, quantity of shirts bought in Canada decreases
• quantity of shirts produced in Canada increases
• quantity of shirts imported decreases to the quota quantity of 1 million a year
WINNERS, LOSERSAND THE SOCIAL LOSS FROMAN IMPORT QUOTA
• an import quota creates winners and losers that are similar to those of a tariff but with an
interesting difference
• Canadian consumers of the good lose
• Canadian producers of the good gain
• imports of the good gain
• society loses: a deadweight loses arises
• consumer surplus shrinks
• some of the consumers surplus is transferred to producers, some is lost because the domestic
cost of production is higher than the world price
• part of the consumer surplus is transferred to importers
• part of the consumer surplus is lost because imports decrease
losses of consumer surplus from the higher cost of production and the decrease in imports is a
•
social loss- a deadweight loss
• one difference between a quota and a tariff is that a tariff brings in revenue for the government
while a quota brings profit for the importers
Other Import Barriers
HEALTHY, SAFETYAND REGULATION BARRIERS
• thousands of detailed health, safety and other regulations restrict international trade
• Canadian food imports are examined by the Canadian Food InspectionAgency, which is
“mandated to safeguard Canada’s food supply and the plants and animals upon which safe and
high-quality food depends”
European Union bans imports of most genetically modified foods
•
• although regulations of this type are not designed to limit international trade, they have that
effect
VOLUNTARY EXPORT RESTRAINTS
• voluntary export restraint is like a quota allocated to a foreign exporter of a good, is not
common
Export Subsidies
• subsidy- a payment by the government to a producer
• export subsidy- a payment by the government to the producer of an exported good
illegal under a number of international agreements
• • although export subsidies are illegal, the subsidies that the Canadian, US and European Union
governments pay to farmers end up increasing domestic production, some of which gets exported
• exports of subsidized farm products make it harder for producers in other countries to compete
in global mark
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