Chapter+9-+Application.+International+Trade



 In chapter 3, we studied the international trade by applying the principle of comparative advantage. However, we haven't got to the point about how the international marketplace achieves these gains from trade and how its distributed equally. With the tools for analyzing how markets work, lets learn more about the effects of international trade.

 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.
 * Words to keep in mind: **

In order to determine country's willingness to become steel importer or a steel exporter, we need to compare the current country's price of steel to the price of steel in other countries. The price that prevails in the world market is called the **world price**. - If the world price is higher than the domestic price, the country will become an exporter. - If the world price is lower than the domestic price, the country will become an importer. - When the world price is equals the domestic price, the country don't have to export or import. The Winners And Losers From Trade
 * The Determinants of Trade **
 * -The World Price and Comparative Advantage **
 * The Gains and Losses of an Exporting Country **

Picture

- When a country allows trade and becomes an exporter, domestic producers of the good are better off, and domestic consumers are worse off. - Domestic producers of steel are better off because they can now sell steel at a higher price. However, domestic consumers are worse off because they have to buy steel at a higher price. - As you can see, after the trade is allowed, the domestic price rises to the world price. Consumer surplus is reduced to area A and producer surplus increased to area B+C+D. - The area D shows the increase in total surplus. - Trade raises the economic well being of a nation.


 * The Gains and Losses of an Importing Country **

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-When a country allows trade and becomes an importer, domestic consumers of the good are better off, and domestic producers are worse off. - Domestic consumers are better off because they can now buy steel at a lower price, and domestic producers are worse off because they npw have to sell steel at a lower price. -As you can see, after the trade is allowed, the consumer surplus increased to A+B+D, and producer surplus is reduced to area C. - The area D shows the increase in total surplus.

**Video: Gains from International Trade ** media type="youtube" key="AMM2OSbu4Lc" height="344" width="425" align="center"

This video explains how the country gains from international trade.

**Tariff** applies only when the country becomes an importer. A tariff reduces the quantity of imports and moves a market closer to the equilibrium without trade. Because the tariff raises the domestic price, domestic sellers are better off, but domestic buyers are worse off. Through tariff, the government raises revenue. <span style="font-family: Arial,Helvetica,sans-serif;"> Picture
 * <span style="color: #000080; font-family: Verdana,Geneva,sans-serif; font-size: 120%;">The Effects of a Tariff **

By looking at the chart, you can see that the consumer surplus extremely decreased and producer surplus and government revenue increased. However, we can discover that the total surplus decreased by area D+F. This is called the deadweight loss of the tariff. The tariff causes a deadweight loss because a tariff is a tax. It encourages the sellers to increase production of steel and encourages the buyers to reduce consumption of steel.

<span style="font-family: Verdana,Geneva,sans-serif;">**5 arguments for restricting trade**
 * <span style="color: #1b1bac; font-family: Verdana,Geneva,sans-serif; font-size: 120%;">The Arguments For Restricting Trade **


 * <span style="color: #404040; font-family: Verdana,Geneva,sans-serif; font-size: 110%;">1. The Jobs Argument **
 * <span style="font-family: Verdana,Geneva,sans-serif;">The jobs argument basically states that the international trade can destroy domestic jobs. Free trade can create jobs or destroy them at the same time. For example, the free trade in paper would cause the price of paper to fall. This will lead to reduction in the quantity of paper produced in Korea, which means that the unemployment in the paper industry will increase.

3. The Infant Industry Argument **
 * <span style="color: #404040; font-family: Verdana,Geneva,sans-serif; font-size: 110%;">2. The National Security Argument **
 * <span style="font-family: Verdana,Geneva,sans-serif;">The national security argument states that certain product can be used to make weapons. Therefore, free trade would allow the country to become dependent on foreign countries to supply steel. However, when the foreign supply is interrupted due to the war, the country might be unable to produce enough weapons to defend themselves. Some companies can exaggerate in terms of national defense to obtain protection.
 * <span style="color: #404040; font-family: Verdana,Geneva,sans-serif; font-size: 110%;">
 * <span style="font-family: Verdana,Geneva,sans-serif;">The infant industry argument states that new industries and old industries argue for temporary trade restrictions to help them get started. The businesses ask for help from the government until they reach the level to trade internationally without any losses. Economists often say that this argument is difficult to implement in practice because they don't know which firms to support.

<span style="color: #404040; font-family: Verdana,Geneva,sans-serif; font-size: 114.4%;">5. The Protection as a Bargaining Chip Argument **
 * <span style="color: #404040; font-family: Verdana,Geneva,sans-serif; font-size: 110%;">4. The Unfair Competition Argument **
 * <span style="color: #130b0b; font-family: Verdana,Geneva,sans-serif; font-size: 104%;">The unfair competition argument states that its unfair to expect the firms to compete in the international trade if different firms follow different laws and regulations. For instance, lets say the price of book is $10 in Korea. However, the exact same book's domestic price is $4 in the United States. This basically means that the buyers are experiencing a huge difference in the surplus.
 * <span style="color: #130b0b; font-family: Verdana,Geneva,sans-serif; font-size: 104%;">
 * <span style="font-family: Verdana,Geneva,sans-serif;">The protection as a bargaining chip argument states that the trade restrictions can be helpful when the companies bargain with their trading partners. In addition, the threat of a trade restriction can also help remove a trade restriction imposed by a foreign government.

<span style="font-family: 'Arial Black',Gadget,sans-serif; font-size: 130%;"> <span style="display: block; font-family: Verdana,Geneva,sans-serif; text-align: center;"> We learned about international trade in detail in this chapter. First of all, the effects of free trade can be determined by comparing the domestic price. A low price indicates that the country has a comparative advantage and it will become an exporter. A high price indicates that the world has a comparative advantage and the country will become an importer. A tariff reduces the gains from trade. It raises government revenue and domestic producers are better off. Lastly, there were five main arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions.

<span style="color: #1b1bac; font-family: 'Arial Black',Gadget,sans-serif; font-size: 120%;"><span style="color: #1a0f0f; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 104%;"> Bibliography 9 <span style="color: #1b1bac; font-family: 'Arial Black',Gadget,sans-serif; font-size: 108%;">