CHAPTER+9+.+APPLICATION+-+INTERNATIONAL+TRADE+;)

=The Determinants of Trade =

Let's say we have a market for laptops  in a country named **Rachaland** .


===The Equilibrium Without Trade === 
 * If there is NO TRADE , the domestic price in the laptop market will balance supply and demand.
 * Questions to Consider
 * <span style="font-family: 'Comic Sans MS',cursive;"><span style="font-family: 'Comic Sans MS',cursive;">If the government allows trade, what will happen to the <span style="color: #800080; font-family: 'Comic Sans MS',cursive;">price <span style="font-family: 'Comic Sans MS',cursive;"> of laptop and the <span style="color: #800080; font-family: 'Comic Sans MS',cursive;">quantity <span style="font-family: 'Comic Sans MS',cursive;"> of laptop sold in the domestic market?
 * <span style="font-family: 'Comic Sans MS',cursive;"><span style="font-family: 'Comic Sans MS',cursive;">Who will <span style="color: #0000ff; font-family: 'Comic Sans MS',cursive;">gain <span style="font-family: 'Comic Sans MS',cursive;"> from the trade, who will <span style="color: #0000ff; font-family: 'Comic Sans MS',cursive;">lose <span style="font-family: 'Comic Sans MS',cursive;">, and will the gains exceed the losses?
 * <span style="font-family: 'Comic Sans MS',cursive;"><span style="font-family: 'Comic Sans MS',cursive;">Should some sort of <span style="color: #008000; font-family: 'Comic Sans MS',cursive;">import restriction <span style="font-family: 'Comic Sans MS',cursive;"> be put in place in the market for laptop?

<span style="font-family: 'Comic Sans MS',cursive;">The World Price and Comparative Advantage
<span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">Should Rachaland <span style="background-color: #ffffff; font-family: 'Comic Sans MS',cursive;"> import or export laptop <span style="font-family: 'Comic Sans MS',cursive;">?
 * <span style="font-family: 'Comic Sans MS',cursive;">It depends on the <span style="color: #008080; font-family: 'Comic Sans MS',cursive;">relative price <span style="font-family: 'Comic Sans MS',cursive;"> of laptop in Rachaland compared with the price of laptop in other countries
 * <span style="background-color: #404040; color: #ffffff; font-family: 'Comic Sans MS',cursive;">World price <span style="font-family: 'Comic Sans MS',cursive;">: the price of a good that prevails in the __world market__ for that good
 * <span style="color: #000000; font-family: 'Comic Sans MS',cursive;">If the <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive;">world price > the domestic price <span style="color: #000000; font-family: 'Comic Sans MS',cursive;">, Rachaland should <span style="color: #ff00ff; font-family: 'Comic Sans MS',cursive;">export <span style="color: #000000; font-family: 'Comic Sans MS',cursive;"> laptop.
 * <span style="font-family: 'Comic Sans MS',cursive;">If the <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive;">world price < the domestic price <span style="font-family: 'Comic Sans MS',cursive;">, Rachaland should <span style="color: #ff00ff; font-family: 'Comic Sans MS',cursive;">import <span style="font-family: 'Comic Sans MS',cursive;"> laptop.
 * <span style="font-family: 'Comic Sans MS',cursive;">__Domestic Price__: opportunity cost of the producing laptop in **Rachaland**
 * <span style="font-family: 'Comic Sans MS',cursive;">__World Price__: opportunity cost of producing laptop **abroad**
 * <span style="font-family: 'Comic Sans MS',cursive;">If the __domestic price is low__, this means that __opportunity cost of producing laptop in Rachaland is low__. Then, Rachaland has a <span style="color: #000080; font-family: 'Comic Sans MS',cursive;">comparative advantage in the production of laptop <span style="font-family: 'Comic Sans MS',cursive;">. Vice versa!

=<span style="font-family: 'Comic Sans MS',cursive;">The Winners and Losers = <span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">We can use <span style="color: #bb6be6; font-family: 'Comic Sans MS',cursive;">welfare analysis <span style="font-family: 'Comic Sans MS',cursive;"> to determine who will gain and who will lose if free trade begins in Rachaland.
 * <span style="font-family: 'Comic Sans MS',cursive;">We will assume that Rachaland is __price taker__ in the world economy. :)
 * <span style="background-color: #404040; color: #ffffff; font-family: 'Comic Sans MS',cursive;">Price taker <span style="font-family: 'Comic Sans MS',cursive;">: Rachaland will take the world price as given and must sell (or buy) at that price.

<span style="font-family: 'Comic Sans MS',cursive;">[[image:순ㅋ.JPG width="320" height="240" align="left"]]
<span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">**World Price > Domestic Price**: Rachaland will <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive;">EXPORT <span style="font-family: 'Comic Sans MS',cursive;"> laptop.
 * <span style="font-family: 'Comic Sans MS',cursive;">The __domestic price will rise__ to the world price.
 * <span style="font-family: 'Comic Sans MS',cursive;">The __domestic quantity of laptop demanded will FALL__.
 * <span style="font-family: 'Comic Sans MS',cursive;">The __domestic quantity of laptop supplied will RISE__.

<span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">With trade, the __domestic quantity demanded will NOT be equal to the domestic quantity supplied__.

<span style="font-family: 'Comic Sans MS',cursive;"> <span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">When a country exports a good, __domestic producers are better off__ and __domestic consumers are worse off.__
 * <span style="font-family: 'Comic Sans MS',cursive;">When a country exports a good, __total surplus is increased__ and the economic well-being of the country rises. :D

<span style="font-family: 'Comic Sans MS',cursive;">
<span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">**World Price < Domestic Price**: Rachaland will <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive;">IMPORT <span style="font-family: 'Comic Sans MS',cursive;"> laptop
 * <span style="font-family: 'Comic Sans MS',cursive;">The __domestic price will fall__ to the world price
 * <span style="font-family: 'Comic Sans MS',cursive;">The __domestic quantity of laptop demanded will RISE__
 * <span style="font-family: 'Comic Sans MS',cursive;">The __domestic quantity of laptop supplied will FALL__

<span style="font-family: 'Comic Sans MS',cursive;"> <span style="display: block; font-family: 'Comic Sans MS',cursive; text-align: center;">

<span style="display: block; font-family: 'Comic Sans MS',cursive; text-align: center;">

<span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">When a country imports a good, __domestic consumers are better off__ and __domestic producers are worse off__.
 * <span style="font-family: 'Comic Sans MS',cursive;">When a country imports a good, __total surplus is increased__ and the economic well-being of the country rises. :D

<span style="font-family: 'Comic Sans MS',cursive;">The Effects of a Tariff
<span style="background-color: #404040; color: #ffffff; font-family: 'Comic Sans MS',cursive;">Tariff <span style="font-family: 'Comic Sans MS',cursive;">: a tax on goods produced abroad and sold domestically <span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">A tariff __raises the price above the world price__. So... the __domestic price of laptop will rise to the world price PLUS the tariff__.
 * <span style="font-family: 'Comic Sans MS',cursive;">As the domestic price rises, the __domestic quantity of laptop demanded will FALL__ & the __domestic quantity of laptop supplied will RISE__.
 * <span style="font-family: 'Comic Sans MS',cursive;">The __quantity of imports will FALL__ and the market will move closer to the domestic market equilibrium.



<span style="font-family: 'Comic Sans MS',cursive;">

<span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">In 2002, President Bush imposed a tariff of up to 30% on most types of steel imported i[[image:http://www.bush2004.com/images/bush_via_the_daily_mirror.jpg width="191" height="204" align="right"]]nto the U.S.

<span style="font-family: 'Comic Sans MS',cursive;">The Effects of an Import Quota
<span style="background-color: #404040; color: #ffffff; font-family: 'Comic Sans MS',cursive;">Import quota <span style="font-family: 'Comic Sans MS',cursive;">: a __limit__ on the quantity of a good that can be produced abroad and sold domestically.

<span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">An import quota __alters the supply of laptop available__. The __supply is no longer perfectly elastic at the world price, but is EQUAL to the domestic supply plus the quota amount__.
 * <span style="font-family: 'Comic Sans MS',cursive;">The __domestic price will RISE__, the __domestic quantity of laptop demanded will FALL__ and the __domestic quantity of laptop supplied will RISE__.
 * <span style="font-family: 'Comic Sans MS',cursive;">The __quantity of imports will FALL__ and the market will move closer to the domestic market equilibrium.



<span style="font-family: 'Comic Sans MS',cursive;">Comparison of Quota with Tariff
<span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="font-family: 'Comic Sans MS',cursive;">Both tariffs and quotas
 * <span style="font-family: 'Comic Sans MS',cursive;">**Raise** the __domestic price of the good__
 * <span style="font-family: 'Comic Sans MS',cursive;">**Reduce** the __welfare of domestic consumers__
 * <span style="font-family: 'Comic Sans MS',cursive;">**Increase** the __welfare of domestic producers__
 * <span style="font-family: 'Comic Sans MS',cursive;">**Cause** __deadweight loss__
 * <span style="font-family: 'Comic Sans MS',cursive;">A tariff raises __revenue for the government__ & a quota creates __surplus for license holders__
 * <span style="font-family: 'Comic Sans MS',cursive;">A quota can potentially cause a larger deadweight loss than a tariff, depending on the mechanism used to allocate the import licenses.

=<span style="font-family: 'Comic Sans MS',cursive;">The Arguments for Restricting Trade = <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">
 * **<span style="font-family: 'Comic Sans MS',cursive;">The Jobs Argument **
 * <span style="font-family: 'Comic Sans MS',cursive;">Domestic producers will have to lay off workers
 * **<span style="font-family: 'Comic Sans MS',cursive;">The National-Security Argument **
 * <span style="font-family: 'Comic Sans MS',cursive;">[[image:http://www.mhsks.org/assets/clientPhotos/Infant.jpg width="182" height="182" align="right"]]Certain industries may produce key resources needed to produce products necessary for national security
 * **<span style="font-family: 'Comic Sans MS',cursive;">The Infant-Industry Argument **
 * <span style="font-family: 'Comic Sans MS',cursive;">New industries need time to get established to be able to compete in world markets
 * <span style="font-family: 'Comic Sans MS',cursive;">Nearly impossible for the government to choose which industries will be profitable in the future and it is even more difficult to remove tariffs or quotas in an industry once they are in place
 * **<span style="font-family: 'Comic Sans MS',cursive;">The Unfair-Competition Argument **
 * <span style="font-family: 'Comic Sans MS',cursive;">It is unfair if firms in one country are forced to comply with more regulations than firms in another country, or if another government subsidizes the production of a good
 * **<span style="font-family: 'Comic Sans MS',cursive;">The Protection-As-A-Bargaining-Chip Argument **
 * <span style="font-family: 'Comic Sans MS',cursive;">Threats of protectionism can make other countries more willing to reduce the amounts of protectionism they use.

<span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">

<span style="font-family: 'Comic Sans MS',cursive;">The Lessons for Trade Policy- Summary

 * <span style="font-family: 'Comic Sans MS',cursive;">**Domestic Price > World Price**: <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive;">IMPORT <span style="font-family: 'Comic Sans MS',cursive;"> & domestic price will **FALL**
 * <span style="font-family: 'Comic Sans MS',cursive;">**Domestic Price < World Price**: <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive;">EXPORT <span style="font-family: 'Comic Sans MS',cursive;"> & domestic price will **RISE**
 * <span style="font-family: 'Comic Sans MS',cursive;">Import: Domestic producers are made worse off, domestic consumers are made better off
 * <span style="font-family: 'Comic Sans MS',cursive;">Export: Domestic producers are made better off, domestic consumers are made worse off
 * <span style="font-family: 'Comic Sans MS',cursive;">Tariff and an import quota will create a deadweight loss because total surplus would fall

Pictures<span style="font-family: 'Comic Sans MS',cursive;"> <span style="font-family: 'Comic Sans MS',cursive;"> http://www.bush2004.com/images/bush_via_the_daily_mirror.jpg http://wpcontent.answers.com/wikipedia/en/thumb/9/92/Consumer_Surplus.png/400px-Consumer_Surplus.png http://www.mhsks.org/assets/clientPhotos/Infant.jpg

http://www.bush2004.com/images/bush_via_the_daily_mirror.jpg