Chapter 9: Application - International Trade

Introduction to International Trade

• Check labels on clothes; many are foreign-made.

• A century ago, textiles and clothing were major U.S. industries.

• Competition from foreign producers with low costs leads to factory shutdowns and worker layoffs in the U.S.

• Most textiles consumed in the U.S. are now imported.

• Key Questions:

  • How does international trade affect economic well-being?

  • Who gains and loses from free trade?

  • How do the gains compare to the losses?

9-1 Determinants of Trade

9-1a Equilibrium Without Trade

• Isoland's textile market is closed to international trade.

• Domestic price adjusts based on supply and demand:

  • Price balances quantity supplied and demanded.

  • Consumer and producer surplus calculated to determine total benefits in market without trade.

9-1b World Price and Comparative Advantage

• Isolandian economists evaluate potential trade impacts:

  • Compare domestic and world textile prices.

  • If world price > domestic price, Isoland exports textiles.

  • If world price < domestic price, Isoland imports textiles.

  • Domestic price reflects opportunity cost, indicating competitive advantage.

9-2 Winners and Losers from Trade

9-2a Gains and Losses of an Exporting Country

• Small economy assumption:

  • Isoland actions have minimal effect on world prices; operates as price taker.

• As domestic equilibrium price rises to world price:

  • Producers benefit (increased producer surplus) and consumers lose (decreased consumer surplus).

  • Total surplus increases, indicating overall economic gain from trade.

9-2b Gains and Losses of an Importing Country

• If domestic price > world price, free trade leads to reduced domestic prices:

  • Consumers benefit (consumer surplus increases), producers lose (producer surplus decreases).

  • Total surplus increases indicates overall gain.

9-3 Trade Policy Considerations

9-3a Job and National Security Arguments

• Arguments for protectionism focus on job preservation.

• National security concerns lead to calls for protecting strategic industries.

• Critics argue trade can create new jobs in industries with comparative advantage despite job losses.

9-3b Unfair Competition Arguments

• Claims of unfair foreign competition due to subsidies and different regulations.

• Economists argue that consumers still benefit from lower prices, even if producers lose.

9-3c Infant Industry and Protection Argument

• New industries argue for protection to develop, but government determination of successful businesses is problematic.

9-3d Benefits of Free Trade

• Free trade examples:

  • Increases variety of goods.

  • Lowers costs through economies of scale.

  • Enhances competition and stimulates innovation.

  • Facilitates technological transfers among nations.

9-4 Conclusion

• Americans overwhelmed by concerns around globalization despite economic evidence supporting trade benefits.

• Theories predicting outcomes of changes in trade policies:

  • Free trade leads to efficient production allocation and higher living standards.

  • Opening markets generally raises economic welfare despite potential individual losses.

Key Takeaways

• Domestic prices provide insights into a nation's comparative advantage.

• Trade impacts lead to consequences on producer and consumer surplus, ultimately affecting total surplus.

• Arguments for restricting trade may be valid but often do not outweigh benefits of free trade.

Key Concepts

• World Price: The prevailing price of goods in international markets.

• Tariff: A tax on imports affecting domestic prices and trade quantities.