fv9 - international trade

AP Microeconomics: International Trade and Public Policy

Page 1: Introduction to International Trade

• Definition and Importance

  • International trade allows countries to expand markets and access goods/services not available domestically.

  • Increases variety and competition, leading to lower consumer prices.

• Public Policy

  • Refers to laws and regulations governing economic activity.

• Trade Agreements

  • Examples include NAFTA and ASEAN.

  • Major U.S. trading partners: China, Canada, Mexico.

• Reason for Trade

  • Trading is often cheaper than domestic production (e.g., shoes, clothing, electronics).

Page 2: Trade Policies - Quotas

• Definition of Quotas

  • Government-imposed limits on the amount of a good that can be imported.

  • Used as trade barriers to protect domestic industries.

• Graphical Representation

  • Illustrates equilibrium price (P_E) and quantity (Q_E) before quotas.

  • Shows the impact of quotas on market dynamics.

Page 3: Trade Policies - Tariffs

• Definition of Tariffs

  • Taxes on foreign goods to reduce imports by raising prices.

• Market Dynamics

  • Before tariffs, market operates at equilibrium price (P_E) and quantity (Q_E).

  • Post-tariff, price increases from world price (P_w) to tariff price (P_t).

• Effects on Surplus

  • Consumer surplus decreases due to higher prices.

  • Producer surplus increases as domestic producers benefit from reduced competition.

  • Introduction of tax revenue and deadweight loss due to inefficiencies.

Page 4: Key Terms to Review

• Consumer Surplus

  • Difference between what consumers are willing to pay and what they actually pay.

• Deadweight Loss

  • Loss of economic efficiency when equilibrium is not achieved.

• Equilibrium Price and Quantity

  • Equilibrium price: where quantity demanded equals quantity supplied.

  • Equilibrium quantity: amount bought and sold at equilibrium price.

• Surplus Changes

  • Various scenarios of how consumer and producer surplus change with trade policies.

Page 5: Additional Key Terms

• Excise Tax

  • Specific tax on certain goods to discourage consumption or generate revenue.

• Importation

  • Process of bringing goods into a country for sale or trade.

• International Trade

  • Exchange of goods/services between countries, allowing specialization and comparative advantages.

• Market Price

  • Price determined by supply and demand forces in a competitive market.

• Perfectly Inelastic Supply

  • Supply remains constant regardless of price changes.

• Producer Surplus

  • Difference between what producers are willing to accept and what they receive.

• Quota Limit

  • Government-imposed limit on the quantity of goods that can be imported/exported.