4.1 and 4.2 Global economy

international trade

the buying and selling of goods and services across national borders

Benefits of free trade

1. Allows specialization of resources increasing output

2. Improves allocation of resources

3. Increases competition, less monopoly power

4. Lower prices and improved quality

5. Forces firms to cut waste and up efficiency

6. Induces domestic firms to achieve economies of scale

7. Permits domestic firms to import capital meeting exact specification

8. More variety for customers

9. Technology and ideas spread faster

10. Countries can acquire natural resources they're not endowed with

MAIN BENEFIT of free trade

stimulates faster growth

"Small" country

Can buy or sell as much of good as it wishes without affecting world price

World price above domestic

Net exports

Social surplus when exports

Consumer surplus decreases, producer increases, overall increase

World price below domestic

Net imports

Social surplus when imports

Consumer surplus increases, producer decreases, overall increase

Tariff

Tax imposed on imports aimed at restricting flow into country and protecting domestic producers

Tariffs on diagram

For country imposing it, they raise PW by tariff, lead to welfare loss as 2 side triangles

List of effects of tariffs

1. Increase domestic price

2. Increase domestic production

3. Decrease consumption

4. Decrease volume of imports

5. Decrease consumer surplus

6. Increase producer surplus

7. Create tariff revenues

8. lead to production inefficiency and resource mislalocation

9. Lead to consumption inefficiency

10. Is responsible for welfare loss

quota

quantitative restriction on volume of imports

Quota on diagram

shifts supply curve left by horizontal distance of quota, only above previous WP (new WP where new supply meets demand)

Difference between quota and tariff

The revenue in equivalent tariff diagram is quota 'rents' that tend to be received by foreign individuals who sell at higher price, unless government auction off quota licenses. This can also lower possibility of retaliation as foreign producers may be better off

Effects of quota

1. Increase domestic price of good

2. Increase domestic production of good

3. Decrease consumption of good

4. Decrease volume of imports

5. Decrease consumer surplus

6. Increase producer surplus

7. Create 'quota rents' (usually for foreigners)

8. Leads to production inefficiency and resource misallocation

9. Responsible for welfare loss greater than equivalent tariff (if rents for foreigners)

Production subsidy

Per unit payment by government on all units of good produced by firm

Export subsidy

Per unit payment by government only on units exported by firm

Economic development

Economic development is the efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base

Economic well-being

Refers to levels of prosperity, economic satisfaction and standards of living among the members of a society

Production subsidy (domestic) on small country diagram

Shift domestic supply vertically downwards by subsidy amount

Effects of production subsidies

1. Does not affect domestic price

2. Does not affect consumption of goods

3. Doesn't affect consumer surplus

4. Increases domestic production

5. Increases producers' revenues

6. Decrease volume of imports

7. Decrease import expenditures

8. Increase government spending (opportunity cost)

9. Leads to production inefficiency and resource misallocation

10. Responsible for welfare loss

Export subsidies and the WTO

Technically export subsidies are banned, but granted in other forms

Export subsidy on domestic diagram

Raises world price by export subsidy amount

Effects of export subsidies

1. Increase domestic price

2. Decrease consumption

3. Decrease consumer surplus

4. Increase domestic production

5. Increase revenues of domestic firms

6. Increase quantity of exports

7. Increase producer surplus

8. Increase government spending (opportunity cost)

9. Production inefficiency and resource misallocation

10. Consumption inefficiency

11. Welfare loss

Administrative trade barriers

Standards set that imports must satisfy, otherwise they are prohibited. Can be health-related, environmental or safety. May also be more "red tape".