Ch.9+Application+-+International+Trade+YD

=TRADE=

[|*equilibrium - answers.com]

Let's look back a several steps back. We can draw a supply curve and a demand curve. The equilibrium point, which determines the price and quantity, will bring about the total surplus to maximum. The consumers will be at their happiest, and the producers will be at their happiest.

But our country United States wants to have some trades with other countries. We already know that trades are related with comparative advantage. The person with a higher comparative advantage will be selling the product, and the person with a lower comparative advantage will be buying the product. This is the same with the trades between countries. The country with a higher comparative advantage will be exporting the product, and the country with a lower comparative advantage will be importing the product. Let's take a closer look:


 * [|world price - internationalecon]

It does look different than the trade graphs we checked before. However, it's saying the same thing: trade is beneficial both sides.

[|*international trade - rochester]
 * Exporting United States.**

Now, say that United States is trading with Jamaica. In this film industry, the U.S. has the comparative advantage, which means that the U.S. has a cheaper price. So when they do trade, the price in the U.S. domestically will become higher, specifically the world price. This is because the U.S. doesn't need to sell at cheap price when they can sell it at a higher price. (Right now, forget about the graph of the world price and just think it that the world price is given as $5.) Now, what does this change... The supply and demand curve is the same as before, but there is a fixed price above the equilibrium point. Now, look at the table below. Previously, consumer surplus was A+B, but now, it is only A. Contrastingly, the producer surplus has changed from D to B+C+D. The consumer surplus has decreased; however, the producer surplus has increased much more than the loss of consumer surplus. Eventually, we can say that the trade is beneficial because the total surplus has increased.

Let's look at Jamaica. Because Jamaica is importing the films, it will be taking the world price that is much cheaper. The consumers, of course, will be much happier because the price is cheaper. The producers, on the other hand, will sad because they lose some profit. Look at the table below. Consumer surplus increases from E to E+F+G. Producer surplus decreases from F+H to H. Is the trade still beneficial? Yes. The benefit of the consumer surplus is much greater than the producer surplus. The total surplus has increased.

[|*tariff - cwx]

Tariff is a kind of tax. The government tries to reduce the imports that is coming in by raising the import prices to help the domestic producers. =ARGUMENTS FOR RESTRICTING TRADE=
 * ||=  ||= Before Trade ||= After Trade ||= Change ||
 * = Consumer Surplus ||= A + B + C + D + E + F ||= A + B ||= - (C + D + E + F) ||
 * = Producer Surplus ||= G ||= C + G ||= + C ||
 * = Government Revenue ||= None ||= E ||= + E ||
 * = Total Surplus ||= A + B + C + D + E + F + G ||= A + B + C + E + G ||= - (D + F) ||

- destroys domestic jobs? - free trade creates jobs at the same time it destroys them.
 * The Jobs Argument**

- some industries vital for national security? - protecting some industries may be appropriate
 * The National-Security Argument**

- help infant industries? - infant-industry argument is difficult to implement in practice
 * The Infant-Industry Argument**


 * The Unfair-Competition Argument**


 * The Protection-as-a-Bargaining-Chip Argument**

world price**: price of a good in the world market
 * __Key Concepts__
 * tariff**: a type of tax that is imposed on imports

Questions 1. What do we call the price that is prevalent in the world? 2. Why is tariff not efficient?

Answers 1. world price 2. Because of the deadweight loss