YR1SM1 Chapter 9 - Microeconomics - International Trade

In a market without international trade, what makes up the total surplus/benefits?

the consumer and producer surpluses

In a market without international trade, what determines the equilibrium price and quantity?

the actions of the domestic buyers and sellers

P_w

the price that the rest of the world pays for a good on the world market

P_d for GOOD A (no international trade)

the price at which consumers within a country pay for the domestically-produced and sold GOOD A

P_d of GOOD A (free international trade)

in theory, the same price at which consumers within a country and consumers around the world pay for GOOD A on the world market

P_d of GOOD A (country imposes a tariff on imports of GOOD A)

In this situation, Pd is rather vague and can take on two different prices because now, the price of the domestically-produced version and the imported version is not the same

the higher price at which consumers within a country must pay in order to import GOOD A from the world market

OR

the price at which consumers within a country must pay in order to obtain the domestically-produced GOOD A

What if domestic producers are selling a good at a lower price within their country compared to Pw?

The domestic country has a comparative advantage and thus should export the good

What if domestic producers are selling a good at higher price within their country than Pw?

The domestic country does not have a comparative advantage and thus imports the good

How do the fundamentals of the perfect competitive market idea apply to the theoretical world market of free trade?

A country is considered so small that it cannot affect the world price of a good, meaning that Pw is the only relevant price worldwide: no seller will accept less than Pw, and no buyer will pay more than the Pw

When a country engages in free trade of the world market, if Pw is set higher than Pd, then what happens to the country’s Qd, Qs, and what is the amount of exports?

Since the price is higher, the quantity that domestic consumers are willing/able to buy decreases, while the quantity that domestic suppliers are willing/able to supply increases. The additional supply becomes exports

If a country buys at the Pw (which is higher than their Pd) what happens to CS and why?

A higher price is less optimal, meaning that consumers are less willing/able to buy at high quantities

If a country buys at the Pw (which is higher than their Pd) what happens to the area of PS?

PS increases to include the triangular area underneath the Pw line and between the S and D lines as well as the lost CS area

How does a Pw > Pd situation disprove the notion that trade benefits everyone?

Although the total surplus increases, the higher world price hurts consumer surplus

With an exporting country, when Pw > Pd, the gains of the … exceeds the loss of the …, thus leading to an overall …

sellers; consumers; plus in total surplus

When a country engages in free trade of the world market, if Pw < Pd, what happens to Qd, Qs, and imports?

Qd rises due to the lower price while Qs falls, causing the additional demand to be met by imports that equal the quantity difference between Qd and Qs

In a country that now uses the lower Pw than their higher Pd, what happens to CS and PS?

PS decreases; CS increases to include the area of the lost PS as well as the triangular area above the Pw line and between the S and C curves

In a country that now uses a lower Pw than their higher Pd, what is the impact on welfare?

This change essentially causes a transfer of welfare from the sellers to the buyers; thanks to the lower price, buyers have more purchasing power overall and thus a greater standard of living

With an importing country, when Pw < Pd, the gains of the … exceeds the loss of the …, thus leading to an overall …

consumer; producer; plus in total surplus

Tariff

tax on imports

Pd vs Pw during free trade vs trade with tariff

Free trade: theoretically Pd = Pw

Tariff present: Pd > Pw

Why do tariffs raise the Pd above the Pw?

The buyers of the country that has imposed the tariff will have to pay more to import a good, while everyone else can still just pay the world price

When the world price is lower than the domestic equilibrium price (eq price without any foreign trade), where will the price line be if the government imposes a tariff?

Domestic equilibrium price is only achieved if trade is purely contained within the country. Since imposing a tariff does not mean the total end to international trade, a tariff will raise the domestic price of a good, but not enough to match the domestic equilibrium price

If the world price is lower than the domestic price, what does the difference in quantity supplied and quantity demanded represent and why?

At a lower price, quantity demanded exceeds quantity supplied. Since sellers are not willing/able to supply more, consumers will look internationally to meet their demands, which represents imports

When a government imposes a tariff, who gains and who does not?

CS decreases while PS increases due to the higher Pd; the government now gains revenue because imports still occur, and the tariff on these imports allows the government to raise tax revenue

On the graph, which areas represent the government tax revenue and DWL from a tariff?

Above the free trade world price and below the tariff domestic price and sandwiched between the D and S curves, there is a trapezoid. The imports * tariff amount = government revenue, while the two triangles on the side represent DWL

With tariffs, there is a net ___ (increase/decrease) in total surplus

decrease

Import quota

a government-imposed limit on how much of a good can be imported

Name 5 ways an import quota has similar effects to a tariff

-domestic price rises

-quantity of imports falls

-CS falls

-PS rises

-creates DWL/decreases total surplus

How does the idea of comparative advantage relate to the argument of whether international trade destroys domestic jobs?

Trade involves concentrating in comparative advantage industries, meaning that some of the country’s industries will shift away from domestic production and towards imports, while other industries will see an increase in domestic production and exports. Import industries lose jobs, while export industries gain jobs

What is the national security argument?

To ensure maximum national security, governments should restrict the market for vital goods to within the country’s borders

Infant-industry argument and rebuttal?

A lack of trade restrictions hinders the development of new industries and thus hinders market competition; however, a temporary restriction is hard to remove later, and oftentimes, trade restrictions are not even needed for a new industry to develop

Describe the unfair competition argument?

Sometimes, a country is able to gain a competitive advantage in an industry through illegal work conditions, meaning that they can sell to the world at lower rates, an exchange which benefits the importing country but exploits the workers in that export industry

Describe the protection as a bargaining chip argument for restricting trade

Restricting trade can act as a threat and negotiation tactic to push a foreign country to offer more favorable trading conditions