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International Trades

As we learned before, without international trades, the price adjusts to balance domestic supply and demand. Like this! However, when international trade is allowed the graph changes to either one of these graphs.

In case the country has the comparative advantage of producing a certain good or service, the country becomes the exporting country. If other nations have the comparative advantage, the country becomes the importing country.

These are the changes made by the international trade.

 **Welfare Effects of an Export Tax** || If the nation imports a good, the domestic producer losses, and domestic consumer gains. If nation exports a good, the domestic consumer losses, and domestic producer gains. This is because a nation is the price taker in the world market, meaning that the domestic price adjusts to fit the international market. In theory, the losses are always smaller than the gains, and the producers of the domestic goods exits the market and tries to enter another market for another good. Thus, international trade is considered beneficial for any nation that participates.
 * || **Importing Country** || **Exporting Country** ||
 * Consumer Surplus || - (A + B + C + D)  || + e ||
 * Producer Surplus || + A || - (e + f + g + h)  ||
 * Govt. Revenue || 0 || + (c + g) ||
 * National Welfare || - (B + C + D)  ||  + c - (f + h)  ||
 * World Welfare |||| - (B + D) - (f + h)  ||

Some people argue against international trade. They say that restricting international trade will: protect jobs, defend national security, help infant industries, prevent unfair competition, and respond to foreign trade restrictions. Governments, if they are convinced by these arguments, might try to restrict the international trade because they want to help the domestic producers. Governments can do that through tariffs and quotas. The effects of the tariffs and quotas are shown on the next graph.

Basically, tariffs tries to minimize the losses of producers. They also try to gain tax revenue. However, the losses for the consumers outweigh all the gains of tariffs combined. Thus, tariffs and quotas are considered bad for the economy as a whole.

chapter 9 key concepts world price: the price of a good that reached equilibrium, in the world market for that good. tariff: a tax on goods produced abroad and sold domestically

Back to home!

Sources: http://internationalecon.com/Trade/Tch90/T90-23.php

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