Chapter+9+Application+International+Trade

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 How does international trade benefit a country’s economy?

If you take a look at any item of goods that you use on a daily basis- such as your laptop, pencil, shoes, food- you will recognize that they are all made from different countries. A good number of these foreign goods come from trade. It is in many country’s interest to engage in trade, because according to the principle of comparative advantage, international trade benefits all countries by allowing each nation to specialize in what they’re good at. In this chapter, we will be analyzing how international markets gain benefit by using previously introduced tools like supply, demand, surplus, and equilibrium.



**The Equilibrium without Trade** When there is no trade, a market only consists of of the buyers and sellers from the country, and the country produces at the equilibrium quantity. The consumer and Producer surplus is in equilibrium without trade! If the country were to start trade with other nations however, they must start out by asking three fundamental questions: 1. how will trade change the quantity and price of a good in the domestic markets? 2. who are the winners and losers of trade? do the gains exceed the losses? 3. should the country issue tariffs?

Before diving straight into these questions, the country first needs to decide whether it will be an importer or and exporter of a good. In determining this, it is useful to compare the domestic price with the world price. World price  is the price of a good that prevails in the world market for that good. World price helps us determine the comparative advantage of a country on a certain good. Since a domestic market is comparatively smaller than the world market, it has a negligible effect on the world price of a good. Since the companies must take the world price as given, they are said to be price takers . If the world price is higher than the domestic price, it means that the country can produce the good for a cheaper price, therefore, it has a comparative advantage. Thus, the country would export the good. Conversely, if the world price is lower than the domestic price it means that it is more expensive for the country to produce the good, therefore the country would need to export from other countries.

Gains and Losses of...  1) Exports  When a country exports a good, the domestic producers of the good are better off and the domestic consumers of the good are worse off. This is because exports allow a greater amount of producer surplus, while decreasing the amount of consumer surplus.However, trade raises the economic well-being of a nation because the gains of producer surplus outweighs the losses in consumer surplus.
 * Who are the winners and losers from trade?**

2) Imports  When a country imports a good, the domestic consumers of the good are better off and the domestic producers of the good are worse off. This is because imports increase consumer surplus, while decreasing the amount of producer surplus. However, trade still raises the economic well-being of a nation because the gains of consumer surplus outweighs the losses in producer surplus.

**What are Tariffs ? ** Tariff  is a type of tax on imported goods. This raises the price of the good, and increases domestic producer surplus and decreases consumer surplus in efforts of trying to place the two closer to equilibrium. Tariffs protect domestic markets, but distorts the supply-demand graph and creates deadweight loss. <span style="color: #23d737; font-family: Verdana,Geneva,sans-serif; font-size: 110%;">Import quotas <span style="font-family: Verdana,Geneva,sans-serif; font-size: 110%;"> are exactly like tariffs in that they reduce the quantity of imports, raises domestic prices, decrease the welfare of domestic consumers while increasing the welfare of producers, and creating deadweight losses. Quotas place limits on the quantity of imports and creates import licenses. The holders of an import license gain profit, which is determined by the difference between the domestic and world price.

1. Trade with other countries destroys domestic jobs
 * What are the counter arguments of Trade?**

2. National security

3. Infant Industry

4. Unfair-competition

5. Production-as-a-bargaining-chip

1. A country is an importer of the good if (a) the world price is lower than the domestic price (b) the domestic price is lower than the world price (c) the domestic demand of a good is higher than the market demand (d) the domestic supply of a good is lower than the market supply answer: a

2. When a country becomes an exporter of a good, (a) the supply curve of the good shifts up (b) the demand curve of the good shifts up (c) domestic producers of the good are better off (b) domestic consumers of the good are better off answer: c

3. placing tariffs on imported goods (a) moves the domestic market away from its equilibrium (b) lowers the price of the good (c) increases the price of the good (d) prevents deadweight loss answer: c (highlight the above to see answers)

<span style="font-family: Verdana,Geneva,sans-serif; font-size: 110%;">**world price**- the price of a good in the world market
 * tariff**- a tax placed on imported goods
 * price takers**- people who have no control over the price of a good, and must accept the market price as given.
 * import quota**- places limits on international trade and creates surplus for the ones with an import license

Bibliography N. Gregory Mankiw __Principles of Mircoeconomics__ (fourth edition) http://www.boston.com/bostonglobe/editorial_opinion/letters/articles/2007/11/11/extolling_the_virtues_of_free_trade/