Chapter 9: International Trade


CHAPTER 9 explores
the effects of TRADE. Refer the Glossary for the bold terms.
Glossary

Quick Overview of Trade
As we learned in Chapter 1, trade makes everyone better off. We will expand the trade to the domestic and world market.
To start with, this is a graph of domestic market without trade:

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Trade: Exporting Country
When a country (domestic) enters the world trade, it has to follow the world price because it is a price taker. The country exports when its quantity supplied is greater than its quantity demanded (=surplus).
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Who's the winner and loser?
SB_11.pngWinner: producers Loser: consumersexternal image moz-screenshot-2.png
When a country becomes an exporter, domestic producers are better off because they can sell the goods at higher price (to be equal with the world price). The trade also increases the producer surplus while it decreases the consumer surplus. Although consumer surplus decreased, the trade makes the country better off because the total surplus increased by "F" (refer the table) after the trade. The gain of the producers exceeds the loss of the consumers.

Trade: Importing Country
The country imports when its quantity demanded is greater than its quantity supplied (=shortage).
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Who's the winner and loser?
SB_14.pngWinner:
consumers Loser: producers
When a country becomes an importer, domestic consumers are better off because they can buy the goods at a lower price (to be equal with the world price). The trade also increases the consumer surplus while it decreases the producer surplus. Although producer surplus decreased, the trade makes the country better off because the total surplus increased by "D" (refer the table) after the trade. The gain of the consumers exceeds the loss of the producers.

The Effects of Tariff
Tariff is imposed by the government only when the country is an importer. The government imposes tariff to raise the price of the imported goods.
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EFFECTS
SB_16.pngDead Weight Loss:
E+G
First of all, tariff raises the price of the imported goods. This reduces the quantity of imported goods and the consumer surplus. Due to the reduction in imported goods, dead weight loss appears. Moreover, since tariff is a form of tax, the government revenue increases by "F," which is the quantity of imported goods that is taxed. The total surplus decreases because of dead weight loss and the loss in consumer surplus.

Restricting Trade
Why does government put tariff even though the total surplus declines? Why does government restrict trade?
The primary reason is to protect the domestic producers from foreign competition. However, there are more to explore.

1. Job Argument: as briefly mentioned above, if the government didn't impose tariff, domestic producers would reduce the supply of the good. This is because consumers would be willing to buy the imported goods since the price is lower than the domestic goods. As a result, domestic producers would lose jobs and have to look for others.
2. National-Security Argument: the government has to portect its key industries such as food and weapons. If the government kept on relying on foreign goods for food or weapons, it wouldn't be able to prepare in case of emergency - war. If the war broke out, how could the country defend itself when most of its essential goods came from other countries?
3. Infant-Industry Argument: newly established industries are known as "infant-industries" because they just started the business. Restricted trade would help these industries because they wouldn't have to compete with foreign industries for now.
4. Unfair-Competition Argument: according to the Mankiw's textbook, free trade is only desirable when all the countries play by the same rules. Since this is not the usual case, government restricts the trade to prevent the unfairness of the competition.
5. Protection-as-a-Bargaining-Chip Argument: by restricting the trade, it can sometimes remove the trade restriction that is already imposed by the foreign government. So it can cancel out the restrictions and lead to a freer trade between countries.

Quiz !
1. Who is the winner and the loser when the country exports? Why?
2. What helps the producers when the country imports too much goods?
3. Why does dead weight loss appear when the tariff is imposed?
4. Why is trade restricted?
Answers

by Sally B.