Economics 1021A/B Chapter Notes - Chapter 7: Deadweight Loss, Import Quota, Canadian Airlines
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15 Nov 2011
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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 A TARIFF
•with a tariff set at $2 per shirt, changes occur
RISE IN THE PRICE OF A SHIRT
•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 FROM A TARIFF
•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: A DEADWEIGHT 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