Chapter+9+-+International+Trade+CDJ

 The World Price and Comparative Advantage
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The country will end up buying or selling a product in world markets of free trade if ... the world price is lower than the domestic price OR the world price is higher than the domestic price.


 * World Price: price of a good that exists in the world market**

So there are two main possibilities in this section. 1. If the world price of product A is higher than the domestic price, than its country will export the product A. 2. If the world price of product A is lower than the domestic price, than its country will import the product A.

For the first choice, the country will be able to export its own product A since they have comparative advantage in producing that good compared to the world price. Thus, by having its domestic price lower than the world price, it has comparative advantage in producing product A compared to the rest of the world.

Remember from the previous possibilities, the first one states, "If the world price of product A is higher than the domestic price, than its country will export the product A."

Take a look at the chart & the graph below:

Here, we could conclude that when a country becomes the **exporter**, the consumer surplus decreases, producer surplus increases, and overall the total surplus increases.

Thus, the trade makes the nation to have "winners exceed the losses of the losers".

The second option states, "If the world price of product A is lower than the domestic price, than its country will import the product A."

Take a look at the chart & the graph below:

Here, it shows that when the country becomes the **importer,** the consumer surplus increase, producer surplus decrease, and overall the total surplus increase.

 Effects of a Tariff
 * Tariff: tax on goods that are being imported**

The word, "tariff" **only matters** when a country becomes an "importer".

Take a look at the graph & the chart below:

So by look at the two pictures, we could see how tariff alters the domestic price.

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Thus, in the free trade, the gains are larger than the loses, which increases the total economic welfare. Moreover, the best policy of a tariff would be allowing a "trade without a tariff".



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<span style="font-size: 140%; color: rgb(255, 0, 124);">The Arguments for Restricting Trade

Listen to the audio below: media type="file" key="econecon.m4a"

<span style="font-size: 140%; color: rgb(217, 63, 63);"> Looking Back... media type="file" key="econ.mov"

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<span style="font-size: 140%; color: rgb(242, 141, 44);"> Problems and Applications http://www.sxc.hu/pic/m/s/sv/svilen001/948294_question_mark.jpg

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1. Tariff is when tax is placed on imported good; however, quota is <span style="font-size: 110%; color: rgb(192, 42, 42);">limiting the quantity of products being imported. Moreover, tariff has government revenue, whereas quota has the revenue of importers.======

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2. Since the world price is lower than the domestic price, <span style="font-size: 120%; color: rgb(23, 34, 94);">Canada will import the candy. This will create **increase** in consumer surplus, **decrease** in producer surplus, but **increase** in total surplus======