Chapter+9+(JEM)+-+International+Trade

__** International Trade **__

When a country agrees to open its market for international trade, the concern is whether the country would import or export. This is determined by the world price - the price of a good that is the most dominant price in the world. If the domestic price of a particular good is higher than the world price of the good, then the country would very likely import the good from another nation because it is cheaper. In vica versa, if the world price of the good is bigger than the domestic price of the good, then the country would export because its good is cheaper and can be sold to more consumers.



As you see in above graphs, the amount of export and is the triangular area between the world price and the equilibrium. In export, the domestic consumers benefits because they get more variety of goods with cheaper prices, while domestic producers are worse off. And in import, the domestic consumers are worse off while the domestic producers are better off because now they can sell their goods to a greater number of people.



In the graph above, the tariff - tax on imported goods - raises the world price and decreases the quantity of the goods imported, creating deadweight losses.


 * Arguments For Restricting Trade **
 * Jobs Argument** - free trade will increase the unemployment rate by creating more losers of international trade domestically.
 * National-Security Argument** - the country will become dependant on other nations to trade materials necessary for national security
 * Infant-Industry Argument** - competition among the industries will become more tense, making it harder for people to start new businesses
 * Unfair-Competition Argument** - different laws apply in different countries; therefore, it will be unfair for some industries entering world market
 * Protection-as-a-Bargaining-Chip Argument** - the country needs to threaten other nations to impose regulations to remove other regulations

Quiz on Chapter 9! 1)Tell the similarities and differences between **TARIFF** and **QUOTA**. 2)How does World price affects domestic market and price (international trade)? 3)Why does government impose tariffs and quotas, if it creates general deadweight loss? 4)Which of the following is not arguments for restricting trade?: Jobs Argument, Infant-industry argument, Unfair-competition argument, Profit-protecting argument, National-security argument. 5)International trade helps domestic market at any time. True or False?

1)Tariff and Quota both creates deadweight loss; Tariff and Quota both reduces total surplus but increases producer and government surplus. Tariff is a tax on imported goods; Quota is limiting the quantity of imports by giving out government bonds. 2)World price > domestic price; then export goods World price < domestic price; then import goods World price = domestic price; then no trade. 3)Government gives out tariffs and quotas to protect domestic producers and increase government revenue. 4)Profit-protecting argument 5)False, It is not at any time; it depends on the world price and domestic price relations