Chapter+9+(International+Trade)

=International Trade =

There are two vocabularies in this chapter that you should keep in mind:
tariff a tax on goods produced abroad and sold domestically

world price the price of a good that prevails in the world market for that good

When discussing for this chapter, you should keep in mind of some questions:


 * When should a 'domestic' country trade?
 * Should the 'domestic' country participate in free trade?
 * What will happen to the 'domestic' consumers and producers?

As you have realized in the question, I mention 'domestic' country/consumer/producers. 'Domestic' here, means the current country that we are referring to, not the 'World,' which is outside of the country who they will trade with. Once you realize the domestic and world price, you are one step ahead of International Trade!

Here is introduction to International Trade:

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Ask yourself this question when you are not sure if your domestic country should export or import:

- Does your country have a comparative advantage? If you do, you export. If you don't, you import.

So why would we trade with the world? By trading with the world, the domestic country will increase their surplus', whether it is the consumers or producers. That is, if and only if it is free trade.

Free trade is when there is no regulation in world trade, such as tariff or quota.

 So lets get into the increase in surplus. When the domestic country export, there will be an increase in producer surplus. But a decrease in consumer surplus. Although there is a decrease in consumer surplus, the increase in producer surplus is greater than the decrease in consumer surplus. Thus, resulting an increase in total surplus.

When the domestic country imports, there will be an decrease in producer surplus. But an increase in consumer surplus. Although there is a decrease in producer surplus, the increase in consumer surplus is greater than the decrease in producer surplus. Thus, resulting an increase in total surplus.

Now, lets talk about why there is an increase in surplus while we import or export.

When the domestic country export, there is a producer surplus because the producers are able to sell the good at a higher price to the world. Although the domestic consumers will not buy as much as pre-trade, the world will make up for that and result with increase in producer surplus.

When the domestic country import, there is a consumer surplus because the consumers are able to buy the good at a higher price from the world. Although the domestic producers will not sell as much as pre-trade, the domestic consumers will make up for that result with increase in consumer surplus.

The arguments for restricting trade:

All the domestic firms would want to make the possible benefit, and not compete with the World.

So the arguments include: Although some of these arguments have some merit in some cases, economists believe that free trade is usually the better policy.
 * Job argument
 * The national security argument
 * The infant industry argument
 * The unfair competition argument
 * The protection as a bargain argument

Questions:

In the diagram, what area represents the total surplus when there is no international trade?

a. A + B + C + D b. A + B + E c. C + D d. A + B + C + D + E

Answer: B

In the diagram above, what area represents the gains from free international trade?

a. C + D b. A + B + C + D c. A + B + E d. A + B + C + D + E

Answer: A

In the diagram above, what area represents the total surplus when there is free international trade?

a. A + B + C + D b. C + D c. A + B + C + D + E d. A + B + E Answer: C

Sources: Textbook: Principles of Microeconomics by N. Gregory Mankiw http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl?fid=M20b&product_isbn_issn=9780324319163&discipline_number=413