international trade econ

economies of scale

1. Increasing the market size for a firm from domestic markets to domestic and international markets causes the demand to increase.

2. This causes to the production level and size of production to increase as well, which leads to a fall in average costs and provides economies of scale to the firms.

3. This allows the firms to reduce their prices for consumers too.

absolute advantage

international trade benefits when countries specialize on certain g/s , less natural resource competition so increase in efficiency, ppc, labour and capital are fully employed here

able to produce g/s at lower unit cost

comparative advantage

are able to produce g/s for lower opp cost, determined by abs advantage

calculate abs advantage

.

for good x, comparative advantage is…

eg. bags of wheat max = 40, dvds max = 8 so 40/8=5, so for every dvd → 5 bags of wheat - can use to determine which country has higher abs advantage, not obvious by just looking for trade

max production Y/Max production X

tariffs

tax on imported goods

why we promote protectionism plus egs

• infant industries (national pride) eg. Chinese government's financial support for its domestic semiconductor industry

• raises gov. revenue

• health and safety eg. Kinder surprise US

• natural security - eg. subsidies to agriculture EU

• Environmental standard  eg. In 2018, the UK banned all cosmetics and personal care products containing microbeads.

• protects job markets/preserves way of life

• Anti-dumping 

PAHINGE

Against protectionism

• free trade lower costs (in protectionism, be aware of downstream industries (eg lithium ion battery needed for phone))

• free trade better for foreign producers

• Free trade leads to more choice - Yet there are almost 1000 different types of bananas. Protectionism and product standards significantly limit the choice for bananas for consumers. 

• free trade better quality (specialization)

• protectionism reduces incentives to improve quality

• risk of retaliatory tariffs eg. US initiated US-china trade war 2023

• encourages consumption

Mainly - misallocation of resources

firstly, tariffs, quotas and subsidies distort prices. Tariffs and quotas increase the price of imported goods, while subsidies decrease the price of domestic goods. Distorting prices has consequences for resource allocation, since price is an important indicator to consumers to determine the quantity demanded.

CFIRMQ

why are subsidies better, but what are drawbacks

no major difference in price or quantity, same consumer surplus but welfare decreases because tax payers have to pay

quota

physical limit on quantity of an import (physical control). Agreements by a country to limit its exports to a country to a given quantity of quota

dumping - mitigated by anti-dumping tariffs

Dumping refers to firms exporting their goods at a price below production cost. It is a type of predatory pricing behaviour. An importer may sell or ‘dump’ goods abroad in order to gain a foothold in a new market.

A Voluntary Export Restraint (VER)

A Voluntary Export Restraint (VER) is a trade policy tool where an exporting country voluntarily agrees to reduce the volume of exports.

japan automobiles to us 1980s

diagram - international trade for important and exporting nations, economies of scale

CS, PS, revenue, DWL quotas, subsidies, tariffs

Dumping - why and cons

why

• get rid of excess supply

• enter a new market quietly

• gain market share or drive out competition

cons

• domestic industries lose sales and jobs

• the market becomes distorted and unfair

• online local firms collapse, foreign firms raise prices

CONFUSE

subsidy

a payment per unit of output from the government to a specific industry to help lower production costs and boost production.

RWE tariff, quota, subsidy

Tariff - US imposed a tariff on imported steel

Quota - until 2005 Under the Multi-Fibre Arrangement (MFA), the U.S. set strict quotas on textile and clothing imports from countries like China, India, and Pakistan.

Subsidy - Eu on agriculture

administrative barriers

• Product standards - health and safety, eg. kinder surprise US

• Voluntary export restraints, eg. Japanese lowered auto exports to US

• ‘Buy National’ policies - eg. australian made

Preferential trade agreement

members reduce/remove tariffs on certain goods imported/exported throughout the region

Free trade agreement (FTA)

members reduce/remove tariffs on all goods imported/exported throughout the region

Customs Union

members reduce/remove tariffs on all goods imported/exported throughout the region, and impose same tariffs on non-member nations