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Chapter 7

Economics 1021A/B Chapter Notes - Chapter 7: Deadweight Loss, Import Quota, Canadian Airlines


Department
Economics
Course Code
ECON 1021A/B
Professor
Michael Parkin
Chapter
7

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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

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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
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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
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