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Chapter 7

Chapter 7- Global Markets

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Department
Economics
Course
Economics 1021A/B
Professor
Michael Parkin
Semester
Fall

Description
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 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