Chapter+Nine

= International Trade=

__Vocabulary__
World price: the price of a good of the world market. Tariff: a tax on goods produced broad and sold domestically

The Determinants of Trade
 Before a country start to trade, there are questions that must be asked? Would the country would export or import? Who would gain from the trade and who would lose? Is a government regulation on imports necessary?

When deciding to trade, one must consider the opportunity cost. By comparing opportunity cost of one’s country to the world price, it would determine if the country would become an exporter or importer. By examining the comparative advantage makes trade beneficial because it allows each country to specialize in doing what it does the best.

The exporting country
 As the graph shows below, exporting country has its equilibrium below the world price. Once a free trade is allowed, the world price becomes the demand curve and intersects with the domestic supply. The intersection of the world price, the new demand curve and the domestic supply is the new price after the trade and it raises equilibrium price to the world price. With this information, we can surmise that domestic consumers are hurt by the increased in price and domestic producers benefited. Then, let’s look at the graph below to compare the surplus to further support this surmise. Before trade, the consumer surplus was A and B and producer surplus was C. After the trade, consumer surplus decreased to A and producer surplus increased to B and C and D. If you compare the total surplus, you would see that before trade it was A+B+C, and after trade it D is included. So trade would benefit the economic well-being of the society because it maximizes the total surplus. In trade, gains from the winner exceed the losses of the losers. || Before trade || After Trade || Change || || A+B || A || -B || || C || B+C+D || B+D || || A+B+C || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">A+B+C+D || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">D || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Consumer surplus
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Producer surplus
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Total Surplus

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">The importing country
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> Then, what happens if you are importing? Importing country is the exact opposite. The world has comparative advantage over the country. The world price is located lower than the equilibrium. The world price after trade becomes a new supply curve, which forms an intersection with the domestic demand. The intersection is the new price and it has decreased. The fall in price would benefit the consumers, but hurt the producers. Again, our surmise is proved by the graph below. The consumer surplus was originally A, but increase to A+B+D. The producer surplus was B+C, but decreased to only C. However, the total surplus had an increase of D, so trade benefits the society. Trade raises the economic well-being because gains from winner exceeds the loss from the loser

|| <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Before trade || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">After trade || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Change || || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">A || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">A+B+D || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">B+C || || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">B+C || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">C || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">-B || || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">A+B+C || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">A+B+C+D || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">D || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Consumer surplus
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Producer surplus
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Total Surplus

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Tariffs and Quotas
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> Tariff is a type of tax on imports. It is only concerned with IMPORTING country. It is very important to know the graph for tariff. It looks very complicated at first and to make it easier, you need to either memorize the graph or be familiar with it. An importing country is under free trade and domestic producers are hurt by it. Government intervenes and puts a tariff on the imported good. The original price of the good was the world price, tariff raises the price above the world price. Now, the price of the steel-both imported and domestic-rises by the amount of the tariff and is closer to the equilibrium without the trade. This change in price affects the consumers and producers and this rise in price leads the quantity to drop. Thus, tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without the trade. Let’s look at the graph to visualize the change. The consumer surplus before the change was A+B+C+D+E+F, but after the trade it was only A+B. The producer surplus, before the trade was G and after trade it increased to C+G. Then there is revenue for government for the taxes that they collected, E. In all, the total surplus is A+B+C+D+E+F+G originally, but after tariff, it reduced to A+B+C+E+G. Now if you subtract the two, there is D+F. These are called **deadweight loss**. This fall in total surplus is very important to know. Because there is deadweight loss, market did not achieve efficiency, in other words, total surplus was not maximized. Tariff encourages the production to increase the quantity of domestic goods, and it also limits the consumption of the good. The deadweight loss here represents overproduction.

The quota is putting limits on the quantity of imports instead of taxing them. It has the exactly the same effects of tariff. It limits the consumption of imports and encourages the domestic supply of goods. There is deadweight loss and market does not achieve efficiency. But it is different from tariff that tariff has a government revenue and quota doest not. The textbook suggests that it is better to have tariff, which total surplus at least include government revenue.

|| <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Before trade || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">After trade || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Change || || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">A+B+C+D+E+F || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">A+B || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">-(C+D+E+F) || || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">G || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">C+G || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">+C || || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">none || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">E || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">+E || || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">A+B+C+D+E+F+G || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">A+B+C+E+F || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">-(D+F) || <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Consumer surplus
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Producer surplus
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Government revenue
 * <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Total surplus

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Why should the government intervene?
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> There are many arguments about why government should put tariff or quota on imported goods, but economists believe that those arguments are faulty. I’ve put a dialogue to under these arguments of domestic producers and economists

The job argument The country is currently importing cell phone from Korea and exporting coffee to the world Domestic producers: “Because of all these imports, domestic producers are losing their jobs in cell-pone companies. Shouldn’t the government protect us” Economist : “Well, that’s too bad, but you should really find jobs in what we could specialize and find jobs in what we have comparative advantage in like coffee ”

The national-security argument Domestic producers: “You, know our country is going to be so dependent on Korea for providing cell phone. This is national-security matter” Economist: “Stop exaggerating so much, we won’t be too dependent on Korea to the extent that we cannot stand on our own. Also, if something that threaten our national security, maybe Korea can be our aid to produce the weapons ”

The Infant-industry argument Domestic producers: “Our cell phone has just established. We deserve to be protected from the foreign competition. Why should our domestic consumers buy cell phones to benefit foreign country ” Economist : “Umm if your industry cannot stand against foreign competition in the short run, then it probably will not in the long run. How can the government determine which company would be profitable in the long run”

The unfair-competition argument Domestic producers: “Korea is putting quota on coffee. Why should our domestic consumers buy cell phones to benefit foreign country when korea is limiting our imports. We should play by the same rule” Economist : “Free trade benefit our Korea as much as our own country. If korea wants to put quota, it’s fine for us because it limits their total surplus”

The protection-as-a-bargaining-chip argument Domestic producers: “We should on tariff and use it as a way of bargaining to get what we want.” Economist : “No it is way too dangerous. War can break out in politics. ”

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">__Summary__
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> - Trade is determined by comparing the world price to the equilibrium. And also opportunity cost or comparative advantage is considered when deciding to import or export. - when a country becomes an exporter, producers are better off and consumers are worse off, but society benefit because total surplus is maximized -When a country becoems an importer, consumers are better off and producers are worse off, but it too benefit the society because of increase in total surplus - Free trade promotes efficiency. It also increases the quantity of goods. - A tariff is a tax on imports. It moves world price (original price without tariff ) higher/ closer to the equilibrium price. It decreases the consumption and encourage overproduction. Tariff is not efficient because there is deadweight loss from overproduction - There are many arguments for restricting the trade, but they are not fully convincing arguments to many economists.

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">__Questions__
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> 1. Where would the equilibrium of importing country be located? a. inside the equilibrium b. above the world price c. below the world price d. need more information such as comparative advantage

2. What does the world price in exporting country become after the trade a. new supply curve b. new demand curve c. y= x+ price d. need more information

3. Fill in the blanks tariff and quota are not efficient because it decrease the ---

4. Tariff - the price of -- goods by the amount of the tariff a. raises/ imported b. raises/ both imported and domestic c. decreases/ domestic d. decreases/ both imported and domestic

Answers 1. b. above the world price 2. b. new demand curve 3. consumer surplus, total surplus or quantity of consumption. 4. b. raises/ both imported and domestic

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">__Media__
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