Microeconomics Chapter 9

Application of International Trade

  • Active learning through the study of international trade

Determinants of Trade

  • Key questions to consider:

    • What determines how much of a good a country will import or export?

    • Who benefits from trade? Who does trade harm? Do the gains outweigh the losses?

    • If policymakers restrict imports, who benefits? Who is harmed? Do the gains from restricting imports outweigh the losses?

    • What are some common arguments for restricting trade? Do they have merit?

The Equilibrium Without Trade

  • Market Participants: Only domestic buyers and sellers present

  • Equilibrium Price and Quantity: Determined on the domestic market

  • Total Benefits from Trade: Total surplus comprises:

    • Consumer surplus

    • Producer surplus

Example 1: Costa Rica - Pineapples with No Trade

  • Q = 2,000 (thousands of tons of pineapples per year)

  • Price of pineapples in Costa Rica: P = $800/ton

World Price and Comparative Advantage

  • World Price (PW): The price that prevails in the world market

  • Domestic Price (PD): The price without trade

  • Comparative Advantage Conditions:

    • If PD < PW: Domestic country has comparative advantage; exports the good.

    • If PD > PW: Domestic country does not have a comparative advantage; imports the good.

The Small Economy Assumption

  • A small economy acts as a price taker in world markets:

    • Its actions have no effect on PW.

    • In free trade, PW becomes the only relevant price.

    • No seller would accept less than PW and no buyer would pay more than PW.

Example 2: Costa Rica Exports Pineapples

  • Without Trade: PD = $800, Q = 2,000

  • Free Trade World Price: PW = $900

  • Domestic Demand under Free Trade: QD = 1,600

  • Domestic Supply under Free Trade: QS = 2,700

  • Exports Calculation: Exports = QS - QD = 2,700 - 1,600 = 1,100

Welfare Analysis of Costa Rica (PW = $900)

  • Without Trade:

    • CS = A + B

    • PS = C

    • Total Surplus = A + B + C

  • With Trade:

    • CS = A

    • PS = B + C + D

    • Total Surplus = A + B + C + D

International Trade in an Exporting Country

  • **Before Trade:

    • Consumer Surplus: A + B

    • Producer Surplus: C

    • Total Surplus: A + B + C**

  • After Trade:

    • Consumer Surplus: A + B + D

    • Producer Surplus: C + (the increase of D)

    • Total Surplus: A + B + C + D

    • Area D shows total surplus increase (gains from trade)

Active Learning 1: International Trade Scenarios

  • Romania's corn price doubles upon opening to international trade:
    A. Comparative Advantage in Corn?
    B. Romania: Exporter or Importer?
    C. Romanian Consumers' Welfare?
    D. Gains from International Trade?

Example 3: Brazil Imports Cocoa Beans

  • Without Trade: PD = $3,000, Q = 170

  • Under Free Trade:

    • PW = $2,500

    • Domestic Demand: QD = 200

    • Domestic Supply: QS = 150

  • Imports Calculation: Imports = QD - QS = 200 - 150 = 50

Welfare Analysis of Brazil (PW = $2,500)

  • Without Trade: CS = A, PS = B + C, Total Surplus = A + B + C

  • With Trade: CS = A + B + D, PS = C, Total Surplus = A + B + C + D

International Trade in an Importing Country

  • Impact Before and After Trade:

    • Changes in Consumer Surplus, Producer Surplus, and Total Surplus

  • Area D represents gains from trade and increase in total surplus.

Summary of Trade Effects

  • Trade creates winners and losers based on whether a good is imported or exported.

  • Gains from trade generally exceed the losses.

Active Learning 2: International Trade and Chocolate

  • Romania opens to international trade; the price of chocolate declines:
    A. Comparative Advantage in Chocolate?
    B. Exporter or Importer Status?
    C. Consumers Better or Worse Off?
    D. Gains from International Trade?

The Effects of a Tariff

  • Definition of Tariff: A tax on goods produced abroad and sold domestically.

  • Impact of Tariff: Increases domestic price above world price by the tariff amount.

Example 4: Brazil Imposes Tariff on Imports

  • Free Trade Initial Conditions: PW = $2,500, QD = 200, QS = 150, Imports = 50

  • After Tariff (Tariff = $300): P = $2,800, QD = 182, QS = 162, New Imports = 20.

  • Welfare Analysis: Illustrates change in surpluses and deadweight losses due to tariff imposition.

Import Quotas: Restricting Trade

  • Definition of Import Quota: Quantitative limit on imports of a good.

  • Effects Similarities to Tariffs:

    • Raises price

    • Reduces quantity of imports

    • Affects buyer and seller welfare similarly.

Benefits of International Trade

  • Increased variety of goods

  • Lowering costs through economies of scale

  • Increased competition

  • Enhanced productivity through resource allocation to more productive firms.

  • Improved access to technology.

Arguments for Restricting Trade

  • Jobs Argument: Trade destroys domestic jobs, but creates new jobs in export industries mitigating net loss.

  • National-Security Argument: Protects vital industries but can be exaggerated-

  • Infant-Industry Argument: Protection needed temporarily, but difficult to remove.

  • Unfair-Competition Argument: Only useful if all countries play by the same rules regarding subsidies.

  • Protection-as-a-Bargaining-Chip Argument: Can secure concessions from trading partners.

Think-Pair-Share Discussion Points

  • Analyze statements from presidential candidates related to trade fairness, subsidies, and the impact of creating trade restrictions.

Final Notes on Trade Effects

  • Free trade policies generally yield the best outcome despite certain arguments for trade restrictions.

  • Expert consensus often favors free trade policies based on the overall benefits despite potential localized drawbacks.