International Trade and Market Regulation

Date: Monday (10/6)
- Midterm review guide is posted to Canvas.
- Students are encouraged to send questions for the midterm review by Monday at noon.
Midterm Exam: Next Wednesday (10/8)
- Required materials: pencil and calculator (no phones allowed).
Exam Organization: Includes:
- Multiple Choice (MC)
- Short Answer (SA)
- Empirical problems with choices.

Governments interact in markets to address market failures.
Quote: “The best laid schemes o' mice an' men / Gang aft agley.”
- By Robert Burns from To a Mouse.
Discusses what trade-offs are acceptable and their context.

Trade expands the range of goods and services available to consumers beyond domestic production.
- Imports: Goods and services bought from abroad.
- Exports: Goods and services sold abroad.

Total Global Exports and Imports: $33 trillion (highest ever), representing 30% of global production valued at $110.5 trillion.
Total U.S. Trade Value: $7.3 trillion, about 25% of U.S. total expenditures.
Economic impact:
- Imports subtract from GDP.
- Exports add to GDP.
Complexity of these calculations notated.

Concept: Fundamental driver of trade between nations.
- Based on divergent opportunity costs between countries.
- National comparative advantage exists when a nation can perform an activity or produce a good at a lower opportunity cost than any other nation.

China has a comparative advantage in T-shirt production due to a lower opportunity cost of producing T-shirts compared to the U.S.
The U.S. has a comparative advantage in airplane production due to a lower opportunity cost than China.
Gains from trade can be achieved when each country specializes in producing goods where they have a comparative advantage.
- Both economies benefit.

Market without International Trade:
- Price: $8 per T-shirt.
- Production and consumption: 40 million T-shirts.

World Price of T-Shirt: $5.
- Comparative advantage lies with the global market, affecting U.S. prices and production.
- Production declines to 20 million T-shirts as imports increase to 40 million units.
- U.S. consumers buy 60 million T-shirts at the world price, highlighting a shift in demand.

Market without International Trade:
- Price: $100 million per airplane.
- Boeing production: 400 airplanes/year.

World Price of Airplane: $150 million.
- U.S. increases airplane production to 700, with domestic sales dropping to 200.
- Resulting in an export of 500 airplanes.

Pre-Trade Surplus: Calculated from consumer surplus and producer surplus.
Post-Trade Surplus Changes:
- Consumer surplus expands with imports.
- Producer surplus contracts, leading to a net gain from imports represented in surplus area D.

Pre-Trade Surplus for Airplanes: Similar analysis applies as with T-shirts.
World Price Effects:
- Consumer surplus declines while producer surplus increases, with area D representing the net gain from exports.

Reasons for restricting trade:
- Protect domestic producers from foreign competition through tariffs, import quotas, and other import barriers (health and safety regulations, export subsidies).

Definition: A tax on imported goods imposed by the importing country.
- For instance, India imposes a 150% tariff on U.S. wine imports, raising effective costs.

Pre-Tariff Conditions: With free trade, world price at $5, imports at 40 million.
Post-Tariff Price Increase: Tariff raises price to $7, leading to reduced imports (10 million) and generating government revenue from tariffs.
Total surplus changes analyzed with shifts in consumer and producer surplus post-tariff.
- Deadweight loss areas noted:
- Area C (producing costs increase).
- Area E (decreases in imports).

Definition: A limit on the quantity of specific goods that can be imported.
- Example: U.S. quotas on products like sugar, textiles.

Analysis showed price increase and adjustment in production and imports following the introduction of a quota.
Total surplus compared between free trade and quota scenarios indicates deadweight loss.

Infant Industry Argument: Suggests new industries may need protection to gain experience, but inherently flawed as protection doesn’t guarantee success.
Countering Dumping: Selling below costs is a complex issue and often management instead of protection is suggested.
Impact on Jobs: While imports may displace certain jobs, they also create new roles within retail and service sectors tied to those imports.
Low-Wage Competition: Higher wages correlate with productivity and should not be an argument against free trade.
Environmental Implications: Free trade potentially leads to better environmental standards in poorer nations over time, challenging the rationale for protectionist measures.

Driven by lobbying from small producer groups aiming to capture trade benefits despite wider public interest in free trade benefits.
Political dynamics favor concentrated interests from producers over dispersed consumer interests leading to higher lobbying incentives against free trade policies.

Economic surplus from trade could be reallocated to support individuals displaced by trade shifts, yet such adjustments are often inadequately addressed in practical policy.