Step+9.+International+Trade-+Lauren

=International Trade = 



__**Brief Introduction**__ Already on Step 9! Half way on the road of mastering Micro Economics! Great Job!

__**Key Terms**__ 1. world price- the price of good that prevails in the world market for that good 2. tariff- a tax on good produced abroad and sold domestically

__**What We Will Learn**__ -why countries trade internationally -how countries decided whether or not to trade internationally -pros and cons of international trade to consumers and producers -how countries limit international trade

__**Introduction**__ Did you ever wonder about why some of the tags on your toys and clothes say Made in China when you live somewhere else? That's all because countries trade internationally. International trade depends on the concept of comparative advantage that you learned in chapter 3! Countries trade internationally to gain benefits, which would be greater than what they get if they trade only domestically.

__**Topics**__ I. How does a country determine whether or not to trade internationally? It all depends on the WORLD PRICE. Well, first of all let's look at this graph. You could see that the country EXPORTS is the domestic price is lower than world price. This is because it means that they have the comparative advantage. In this case, you could see that the consumers lose profit from A+B to just A while the producers earn profit from just C to B+C+D. The country still exports even though the consumers lose profit because the total surplus gain (+D) is greater than the loss. You could see that the country IMPORTS when the world price is LOWER than domestic price. This is because they don't have the comparative advantage. In this case, the producers lose profit from B+C to just C while the consumers earn profit from A to A+B+D. The total surplus once again gains +D so the country still imports even though the producers lose some profit.

Note that the countries trade even when one side loses profit because the OVERALL profit is greater than their loss.

The only other thing that you need to know about international trade is what's called a TARIFF. Country impose tarrifs to control imported goods. It's a tax on imported goods. The tariff is imposed because it REDUCES the quantity of imports and moves the domestic market CLOSER to its equilibrium without trade. There are many reasons why countries impose tariffs and restrict trade: 1. Jobs Argument- if free trade is imposed, domestic companies lose profit and there will be more unemployment. It's better for domestic workers to get jobs than foreigners that work in the foreign country that exports. 2. National Security Argument- if there's a competition between industries from other countries, some industries argue that they are vital for national security. For example, a gun making company might argue that their country should not import guns from foreign countries because it threatens the national security if the trade goes wrong. 3. Infant Industry Argument- it is true that free trade could hurt domestic industries so tariffs and other restrictions help infant industries get some time to grow. 4. Unfair Competition Argument- If all countries don't follow the same rules, the trade becomes unfair. 5. Protection as a Bargaining Chip Argument- restrictions sometimes help bargaining for a better profit.

__**Conclusion **__ So, do you now understand why we have lots of made in chinas on our products? It's because their world price is lower than our domestic price for something like labor or land price for factories. Countries trade if the total benefit is higher than the loss of one side.

__**Quiz **__ 1. A country would _ if the world price is higher than the domestic price. 2. Which side loses some profit when a country imports? a. consumers b. government c. producers d. foreign country

A: export, c

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