Chapter+9+INTERNATIONAL+TRADE+Erica

We have been dealing with trade with PPF (Production Possibility Frontier) and comparative advantage so far. In this chapter, we will analyze international trade by surplus in this chapter. We learn that trade increase total surplus in previous chapter, and we will prove that by using surplus (Producer surplus, consumer surplus, total surplus, revenue etc).

A country __**EXPORTS**__ when, **domestic price < world price**

This means that country has the __comparative advantage__ of producing the good, which is an indicator that domestic price is less than the world price. When that country exports good, domestic price goes up to world price. This will give benefit to the producers because producers will get more money than they do in domestic market. However, buyers will lose money because the price of the good will go up than before. media type="youtube" key="aLe_LF622JI" height="344" width="425" Video for your better understanding in COMPARATIVE ADVANTAGE. Remember, comparative advantage is the factor that determines whether you import or export !! :)

Here is the graph. Let's back off and define one term WORLD PRICE. World Price is the price of a good that prevails in the world market for that good.  ||  **Before trade** ||  **After Trade** || **Change** || ||  A+B ||  A || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">-B || || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> C || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> B+C+D || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> +B+D || || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> A+B+C || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> A+B+C+D || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: rgb(233, 22, 22);">D: net gain from trade || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Therefore, Consumer will be worse off, and Producer will be better off. However, country as a whole will be better off because Total cost will increase from A,B,C to A,B,C,D, which gives D, a net gain from trade.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **C.S**
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **P.S**
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **T.S**

A country<span style="color: rgb(122, 6, 183);"> __**IMPORTS**__ when, **domestic price > world price**

This means that country <span style="color: rgb(232, 2, 2);">__doesn't have the comparative advantage__ of producing the good, which is an indicator that domestic price is greater than the world price. When that country imports good, domestic price goes down to world price. This will give benefit to the buyers because producers will get more money than they do in domestic market. However, producers will be worse off because the domestic buyers will tend to buy more imported product since the imported product is cheaper than the domestic product. Here is the graph. || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **Before trade** || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **After Trade** || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**Change** || || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> A || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> A+B+D || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">+B+D || || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> C+B || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> C || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">-B || || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> A+B+C || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> A+B+C+D || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: rgb(233, 22, 22);">D: net gain from trade || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Therefore, Producers will be worse off, and Consumers will be better off. However, country as a whole will be better off because Total cost will increase from A,B,C to A,B,C,D, which gives D, a net gain from trade.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **C.S**
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **P.S**
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **T.S**

In conclusion, we were able to prove that no matter you import or export, <span style="color: rgb(0, 153, 14);">__country as a whole is better off with trade__ because it increases the total cost of the country.

media type="youtube" key="AMM2OSbu4Lc" height="344" width="425" This media proves that countries are BETTER OFF when they trade.

WINNERS AND LOSERS FROM TRADE The gains of the winners exceed the losses of the losers. The net change in total surplus is positive.

TARIFF AND QUOTA Tariff and quota will only be applied to the importing countries which import to protect the producers in the importing countries. Tariff and Quota will encourage people to buy more domestic goods than imported goods.

Tariff, is a tax that is imposed on imported goods (MONEY) It puts the price of the imported goods up. || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**Before Trade** || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**After Trade** || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**Change** || || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A+B+C+D+E+F || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A+B || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">-C-D-E-F || || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">G || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">C+G || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">+C || || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">NONE || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">E || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">+E || || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A+B+C+D+E+F+G || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="color: rgb(240, 40, 40);"><span style="color: rgb(3, 3, 3);">A+B+C+E+G || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="color: rgb(240, 40, 40);">-D-F: This shows he fall in total surplus and represents the DWL of the tariff. || <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">__** Tariff will... **__ <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Quota is limiting quantity that are imported domestically. Tariff deals with money, Quota deals with quantity. (I know chapter 9 has nothing about quotas but we went over with Mr.Ski, so I wanted to add this into the online textbook. THIS WAS ON THE EXAM!!)
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**C.S.**
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**P.S.**
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**G.R.**
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**T.S.**
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Create DWL
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Create Government Revenue
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Decrease the Imports
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Decrease the Total Surplus
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Increase Producer Surplus

Blue rectangle in the middle is called import/quota revenue. In quota, instead of Government revenue, there's Import/quota revenue for firms. The two black triangles are DWL.

If you see this graph, curve of supply 2 is kinking. This is why. For example, you are owning a restaurant, and your country's government decided to import wines from foreign country in cheaper cost, but decided to limit the quantity of wine being imported, so that domestic producers can also benefit from it. So you buy wine for your restaurant, and one day the country has used all the imported wines that it has imported. Since your customer demands wine, you will have to buy domestic wine in higher price every unit you buy. That is why the second supply curve kinks at the middle.

Then, what does a quota do? __**<span style="font-size: 150%; font-family: 'Arial Black',Gadget,sans-serif;">Quota will.. **__
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Increase the World Price
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Create DWL
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Decrease Imports
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Decrease Total Surplus
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Increase Producer Surplus
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Creates import/quota revenue

media type="youtube" key="QA_uwnWSnOM" height="344" width="425" Okay, these are the series of Youtube media that explains about TARIFFS AND QUOTAS :) http://kr.youtube.com/watch?v=QA_uwnWSnOM Credits to [|Neilio55] <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 130%; color: rgb(255, 160, 0);"> There are 5 arguments for restricting Trade <span style="color: rgb(242, 24, 24);">1) The Jobs Argument <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; color: rgb(46, 38, 49);">* This argument states that trade with other countries can POSSIBLY (NOT ALWAYS!) destroy domestic job. If the free trade cause the price of a good to fall, reducing the Q of good n a country will lead to reducing employment.

2) The National Security Argument <span style="color: rgb(8, 7, 7);">* For example, if a country imports steel to other countries, it will make the importing country dependent on foreign country. If a war later break out and the foreign supply was interrupted, the importing country might not be able to produce enough steel or weapons to protect themselves.

<span style="color: rgb(18, 176, 7);">3) The Infant Industry Argument <span style="color: rgb(26, 15, 15);">* New industries argue for temporary trade restrictions to help them get started. This basically means that new businesses ask government to protect them by not importing the goods that they produce from foreign country for them to get started or to improve. However this is a difficult decision because no one knows if that business will be successful in the long run or not. Disadvantage of protecting infant industry is it creates temporary losses (DWL).

<span style="color: rgb(76, 77, 240);">4) The Unfair Competition Argument <span style="color: rgb(19, 11, 11);">* Some argue that free trade is desirable only if all countries play by the same rules. If firms in different countries are subject to different lwaws and regulations, then it is unfair to expect the firms to compete in the international market place.

<span style="color: rgb(211, 0, 240);">5) The Protection as a Bargaining Chip Argument <span style="color: rgb(27, 19, 19);">* Many policy makers claim to support free trade but, at the same time, argue that trade restrictions can be useful when we bargain with our trading partners. They claim that the threat of a trade restriction can help remove a trade restriction already imposed by a foreign government.

<span style="font-size: 120%; color: rgb(247, 2, 2);">KEY WORDS FROM CASE STUDY! <span style="background-color: rgb(28, 13, 13);">Unilateral: when a country removes its trade restrictions on its own. Multilateral: a country reduces its trade restrictions while other countries do the same.

QUICK QUIZ! 1. What can domestic price tell you about trade? 2. When does a country become an exporter of a good? An importer? 3. What is tariff? 4. What does quota do? 5. If you import, who will benefit? What if you export?

Answer: 1. If the country have the comparative advantage or not 2. exporter when domestic price<world price. Importer when domestic price>World price 3. A tariff is a tax on goods produced abroad and sold domestically. Tariffs raise the price of imported goods above the world price by the amount of the tariff. 4.Quota raises the domestic price above the world price. 5. If you import, consumers will benefit if you export, producers will benefit.

=BRIEF SUMMARY= Basically, KEY to this chapter is comparative advantage. Whether you import or export depends on your comparative advantage. If you have the comparative advantage, meaning you have LESS opportunity cost in producing a certain product, you can export that product, but if you don't you must import. When you trade with other countries, government usually set a quota (LIMITING Q), or a tariff (TAX ON IMPORTED GOODS) to protect the domestic sellers.

When a country trades, and exports, producers are better off and the consumers are worse off because the price goes up to the WORLD price which is higher than the domestic price. When a country trades, and imports, consumers are better off and producers are worse off because the domestic price DROPS down to world price.