Chaper+9+-+Micro

__**Chapter 9: International Trade**__

Well, as the title of the chapter denotes, this chapter will purely look at the very basics of international trade, and its big impact on our lives today. Trading internationally is a bit like trading with only one other person, but just a tad bit more complicated.

But first, we have to know a few more terms. The **world price** of a good is the price of a good in the world market. Because for a good, there might be tens of countries with millions of that good, it's hard for one smaller nation to totally change that price if they enter the market. And the world price is perfectly elastic. For example, if the world price of ice cream is 3 dollars, and if there are hypothetically 1,000,000,000 bars of ice cream on the market, and the nation you come from puts in 5,000 bars of ice cream, you can't change the world price. This is because if you set your ice cream to 4 dollars, who in the world would buy your ice cream, when you can buy the //exact// same ice cream for 3 dollars? Remember, trade, if you recall from Chapter 3, is based on comparative advantage.

The world price is important in determining whether or not a country will be an exporter of a good, or an importer. First, let's look at exports.


 * Exports**

You export a good IF the world price of a good is __HIGHER__ than the domestic price to acquire an item. For example, let's say that the world price is 4 dollars. But the domestic price, the price for your country to make an item, is 2 dollars. Let's look at a production possibilities frontier.

Well, look at this carefully. The domestic producers aren't selling at the equilibrium. Do you remember what happens if they sell items too expensively? It's called a //surplus,// which basically means that it's so expensive that people don't want to buy it, and that there will be goods leftover. But in this case, this is good, because the extra surplus goods go to the INTERNATIONAL MARKET. This way, sellers are still selling all of their goods.

This means that the price for the consumers will increase. But remember, we look at the total surplus when we look at trade. And according to the box above, if the WORLD PRICE > domestic price, the consumer surplus will decrease, but the producer surplus will increase more that the consumer surplus decreased, leading to a more positive TOTAL SURPLUS.


 * Imports**

Basically, you IMPORT a good when the WORLD PRICE < domestic price. For example, the world price is 5 dollars, while the price to buy the same exact thing in your country is 6 dollars. Which one would you buy? Hopefully the 5 dollar good.



If you look at this picture, you can see that this time, everything is flipped from the exporting side. So now, there is a shortage of goods, because domestic countries have to compete with foreign markets that sell that good for a cheaper price. But because there is an extra demand, the imports can fill in perfectly.

When a country exports, the domestic producers' surplus decreases, but the consumer surplus increases more than the producer surplus decreases, leading to a net positive increase in total surplus.


 * Tariffs/Quota**

What is a tariff? A **tariff** is a tax on an imported good. Basically, countries do it when they want to protect domestic producers from better foreign producers so that the economy keeps on running smoothly. Sometimes it works well, and in other times, it doesn't.

Unfrotunately, it's probably the hardest thing you'll learn this chapter. Here's the diagram:



As you can see, it's a bit confusing, and has many boxes. Think of tariffs like this: they're like a tax, but for international trade. So because it's like a tax, it brings all the things that trade usually brings in: government revenue, and deadweight loss. As you can see, CS (Consumer Surplus) decreases, PS (producer surplus) increases, which is the purpose of tariffs, Government Revenue increases, and deadweight loss increases. However, the TS (Total Surplus) decreases, which is why many economists oppose tariffs.

A quota is very similar to a tariff. The government of a country for a particular good gives out permits permitting a few certain people, called quota holders, the ability to import that good without paying taxes. These quota holders sell their permits to other people, earning themselves money. The only difference in the graphs is that the box E, usually for government revenue, goes to Quota Holders.

There are a few arguments against international trade, a tariff being one of them. Here's a few others:
 * Arguments Against Trade**

__Jobs Argument__ Proponents of this argument argue that international trade destroys domestic jobs. For example, if America imported ice cream from China, there would be less ice cream making in America, leading to less US ice cream workers. But the thing is, it also creates new jobs, in new industries where the US has a comparative advantage.

__National-Security Argument__ This argument states that for certain items, such as steel which can be created to make weapons, a country shouldn't import the good, lest the country will become dependent in times of crisis. But most proponents of this argument exaggerate, and to be honest, if they get weapons in the first place, it would be cheaper to internationally produce the goods.

__Infant-industry Argument__ This argument states that by secluding itself from international trade, a country will help many newer businesses grow, until they are at a level to internatoinally trade without losing their businessses. Most economists are skeptical of this idea, because they don't know which firms will be profitable to protect, or doomed for failure.

__Unfair-Competition Argument__ This argument states that some countries use different rules to constitute their international trading laws. For example, with the help of their government, one country's ice cream is $1, while the exact same one is 5$ domestically. However, this means that there is a huge consumer surplus for the buyers of ice cream, and it is the tax payers of the other ocuntry, who pay the difference.

__Protection-as-a-Bargaining-Chip Argument__ Some countries use threats with tariffs and stuff to protect their domestic products. But the problem is that sometimes, it can backfire. For example, if you threaten a country to remove a trade restriction or face a tariff, it can backfire. If the other country accepts, it means a smaller TS for your country. But if the other country refuses and you don't follow your word, your international reputations could drop.

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__Key Terms__ world price - price of a good that is prevails in the world tariff - tax on imported goods

__Summary__

Basically, we looked at a few aspects of International Trade. Importing a good would be better for the consumers, and exporting would help the suppliers. In both cases, the Total Surplus increases, which means that the country is better off, even though to certain people it might not feel like it.

Some countries like to protect their domestic producers, so they impose tariffs or quotas, taxes on imported goods.