Chapter 9 - Application: International Trade

9-1 The Determinants of Trade

The Equilibrium without Trade

• Domestic prices adjust to balance the quantity supplied by domestic sellers and the quantity demanded by domestic buyers.

The World Price and Comparative Advantage

• Domestic prices reflect the opportunity cost of the country.
• World price: the price of a good that prevails in the world market for that good.

9-2 The Winners and Losers from Trade

The Gains and Losses of an Exporting Country

• Price takers simply take the price as it's given.
• The small fire economy assumption says that one country has little effect on the world's markets.
• Domestic prices often rise when trading, in order to reach the world price.
• The quantity of goods being supplied is larger than the demand to sell/export to other countries.

The Gains and Losses of an Importing Country

• Domestic producers consumers of a good are better off, unlike domestic producers, who're worse off.
• Trading gives rise to a nation's economic well-being.

The Effects of a Tariff

• Tariff: a tax on goods produced abroad and sold domestically.
• With tariffs, demands decrease while supplies increase.
• A tax on textile imports in Isoland would only make sense if Isoland becomes a textile importer, not a textile exporter.
• Tariffs raise the prices of imported textiles above the world price and because of this, textiles are often priced depending upon the amount of the tariff.
• Tariffs reduce the rate of consumption because of increased prices.

The Lessons for Trade Policy

• If the world price is higher than the prices in our country, we have to export.

Other Benefits of International Trade

• International increases the variety of goods, lowers the costs through economies of scale, increases competition, increases productivity, and enhances flows of ideas.
• Goods from different countries are not identical because of free trade, which allows consumers in all countries to have a variety of goods to choose from.
• Economies of scale are when some goods can be produced at lower costs only if they can be produced in large quantities.
• International trade allows productive firms to expand their markets.
• By transferring technological advances, exchanging goods is positively influenced by those advances.

9-3 The Arguments for Restricting Trade

The Jobs Argument

• Some people argue that free trade destroys domestic jobs.
  • Ex. free trade in textiles could cause the price of textiles to fall, which would reduce the quantity of the textiles produced in Isoland. Loss of textiles would cause a loss in employment in the Isolandian textile industry.

The National-Security Argument

• Economists know that key industries must be protected but they fear that consumers may be negatively affected.

The Infant-Industry Argument

• Economics are typically skeptical about the infant-industry argument.

The Unfair-Competition Argument

• Some people argue that free trade is only desirable if all countries play by the same rules.

The Protection-as-a-Bargaining-Chip Argument

• Unilateral approaches include removing trade restrictions on their own.
• Multilateral approaches include the reduction of trade restrictions.

9-4 Conclusion

• Trade allows production to be allocated and raises the living standard, whether it be at home or abroad.

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