International Trade and Public Policy

Changing Equilibria from Trade

• Trade leads to reallocation of resources based on comparative advantage

• While total surplus increases, indicating overall economic gains, there are winners and losers

  • Consumers benefit from imports (lower prices)

  • Producers benefit from exports (higher prices)

• Impact of Imports

  • If the world price is lower than the domestic price:

    • The country will import the good

    • Domestic price decreases to match the world price

    • Consumer surplus increases due to lower prices

    • Producer surplus decreases as domestic producers receive less for their goods

    • Total surplus increases, indicating a net gain from trade

• Impact of Exports

  • If the world price is higher than the domestic price:

    • The country will export the good

    • Domestic price increases to match the world price

    • Producer surplus increases due to higher prices

    • Consumer surplus decreases as consumers pay more

    • Total surplus increases, reflecting gains from trade

Trade and Tariffs

• Quota rent: difference between demand price and supply price

• Tariffs: tax placed on a good that is imported or exported

• Import quota: restriction on the quantity of a good that can be imported

• The purpose of a tariff is to make imported goods more expensive, thereby encouraging consumers to purchase domestically produced items.

• Tariffs raise the price of imported goods

• Higher prices lead to a decrease in the quantity of imports

• Domestic producers may benefit from reduced competition and higher prices

• Consumers face higher prices and fewer choices​

• Tariffs can lead to a deadweight loss, which represents the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved

• This loss occurs because some mutually beneficial trades between buyers and sellers do not happen due to the tariff-induced price increase

• Tariffs generate revenue for the government, calculated as the tariff amount multiplied by the quantity of imports

• While tariffs can protect domestic industries, they often lead to higher prices for consumers and a net loss in total surplus due to deadweight loss