(BTY) Chapter 9

Application: International Trade


Today, wherever you live, various kinds of things are made by foreign countries. People wear Italian, drive German, and use American computers. Much of the items we consume are imported.
But, how does international trade effect economic well-being? All countries benefit from trading with one another because trading allows each country to specialize in doing what it does best.
A country tends to trade when they have the comparative advantage. And to find out whether they have it or not, we compare their domestic price and the world price, which is the price of a good that prevails in the world market for that good. The domestic price reflects the opportunity cost of the country. If their domestic price is lower than the world price, they have the comparative advantage, therefore they export the good. On the other hand, when the country’s domestic price is higher than the world price, they import the good.
external image cheese1.GIF
http://william-king.www.drexel.edu/top/prin/txt/trade/cheese1.GIF

Export (Left Graph)

World Price>Domestic Price
A country tends to export a good when they have the comparative advantage, which means that their domestic price is cheaper than the world price. Sellers are better off since the producer surplus rises with the price. On the other hand, consumers are worse off because the price of the good rises. But the sellers’ surplus exceeds the consumers’ loss. Therefore, the trade raises the economic well-being of the country as a whole.(+Surplus=The triangle region between the price, S, and D)


Import (Right Graph)

World Price<Domestic Price
A country tends to import a good when they have the comparative advantage, which means that the world price is cheaper than their domestic price. Consumers are better off since they get to buy more goods in cheaper prices. On the other hand, sellers are worse off because they have to compete with the foreign firms, the price drops, and their position in the market decreases. However, the trade still raises the economic well-being of the country as a whole.(+Surplus=The triangle region between the price, S, and D)


Tariff

A tax on goods produced abroad and sold domestically
external image 450px-EffectOfTariff.png
http://upload.wikimedia.org/wikipedia/en/thumb/6/61/EffectOfTariff.png/450px-EffectOfTariff.png

There are several reasons why the government levies tariff despite the deadweight losses.
1. To protect domestic firms from competition by reducing the imports.
2. To raise revenue for the government.
The government raises the price by the amount of tariff so that the sellers get to sell more goods in higher prices, while the world price goes up. Therefore, importing goods are definitely worse off. It’s worse off for the domestic consumers because the price goes up and choices decrease.



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Summary
All countries benefit from trading with one another because trading allows each country to specialize in doing what it does best. A country tends to trade when they have the comparative advantage. There are several reasons why the government levies tariff despite the deadweight losses: To protect domestic firms from competition by reducing the imports and to raise revenue for the government.

Questions
1) When does a country export good?A country imports a good when they have the comparative advantage.
2) Why is tariff levied?Tariff is levied to protect domestic firms from competition
3) Is trade beneficial to both sides?
4) What do you consider when dealing with trade?

Answers
1)A country EXPORTS a good when they have the comparative advantage.
2)
Tariff is levied to protect domestic firms from competition
3)Trade is always better off to both sides.
4)
You consider the comparative advantage, not the absolute advantage when you deal with trade.