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    Chapter 27 International Trade

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    JasonZhao
    This document summarizes key concepts around international trade, including comparative advantage, gains from trade, and protectionist policies. It explains that when countries specialize in goods and services where they have a comparative advantage and trade freely, this leads to higher productivity and standards of living overall. Protectionist policies like tariffs and quotas can benefit domestic producers but reduce total economic surplus by making trade less efficient. While some groups may lose from trade, free trade increases total economic surplus and winners could potentially compensate losers.

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    Chapter 27 International Trade

    Uploaded by

    JasonZhao
    78 views3 pages
    This document summarizes key concepts around international trade, including comparative advantage, gains from trade, and protectionist policies. It explains that when countries specialize in goods and services where they have a comparative advantage and trade freely, this leads to higher productivity and standards of living overall. Protectionist policies like tariffs and quotas can benefit domestic producers but reduce total economic surplus by making trade less efficient. While some groups may lose from trade, free trade increases total economic surplus and winners could potentially compensate losers.

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    This document summarizes key concepts around international trade, including comparative advantage, gains from trade, and protectionist policies. It explains that when countries specialize in goods and services where they have a comparative advantage and trade freely, this leads to higher productivity and standards of living overall. Protectionist policies like tariffs and quotas can benefit domestic producers but reduce total economic surplus by making trade less efficient. While some groups may lose from trade, free trade increases total economic surplus and winners could potentially compensate losers.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    78 views3 pages

    Chapter 27 International Trade

    Uploaded by

    JasonZhao
    This document summarizes key concepts around international trade, including comparative advantage, gains from trade, and protectionist policies. It explains that when countries specialize in goods and services where they have a comparative advantage and trade freely, this leads to higher productivity and standards of living overall. Protectionist policies like tariffs and quotas can benefit domestic producers but reduce total economic surplus by making trade less efficient. While some groups may lose from trade, free trade increases total economic surplus and winners could potentially compensate losers.

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    Chapter 27 International Trade

    History: Civil War, Anaconda Plan used to block Confederacy from trading its cotton with Britain
    -benefits of trading, cotton sold 10 to 20 times more than in Confederacy
    NAFTA (North American Free Trade Agreement)
    -opposition due to costing American jobs
    Comparative Advantage: Nations specialize in product with comparative advantage, then trade freely
    Effects of Trade Restrictions
    Comparative Advantage as a Basis for Trade
    -specialization based on comparative advantage, with trade between producers of different goods
    and services
    +higher level of productivity and standard of living
    -principle of comparative advantage: enjoy more goods and services when each country produces
    according to comparative advantage and trade with each other
    Production and Consumption Possibilities and the Benefits of Trade
    Close economy: does not trade with the rest of the world
    Open economy: trades with other economies
    PPC: smoothly-bowed shape, slope of PPC = OC of producing an additional good, more of one good
    produce = higher OC
    Consumption Possibilities with and without International Trade
    Consumption Possibilities: combinations of goods and services that countrys citizens might consume
    -closed economy with no trade = societys consumption possibilities are identical to production
    possibilities (autarky)
    -open economy with trade = societys consumption possibilities greater than production possibilities
    +trade allows conversion of one good to money to purchase another good -> more of another
    good than PPF
    +CPC tangent to PPC has slope = ratio of Px/Py, the amount of goodY needed to be traded to
    get one unit of goodX
    +at tangent point, OC increasing Good X = OC purchasing extra Good Y, largest total revenue
    World Prices Affecting Nations Production
    Case Study: Nation can produce equal amounts of coffee and tea in one day (800 pounds)
    -If Price of Coffee = 2 Price of Tea, country will produce as much coffee as possible and no tea
    +this will cause CPC to extend the amount of Tea with trading
    -If Price of Coffee = Price of Tea, country will produce as much tea as possible and no coffee
    +this will cause CPC to extend the amount of Coffee with trading
    A country maximizes its consumption possibilities by producing at the point where CPC is
    tangent to PPC, then trading to reach preferred point on CPC
    Cheap foreign labor posing danger to high-wage economies
    -argument: high-wage industrialized countries lose by trading with low-wage developing nations

    -principle of comparative advantage and specialization advantages


    -low wages = low productivity of labor, thus less productive than developed nations
    -nations gain by one nation specializing under comparative advantage
    A Supply and Demand Perspective on Trade
    Add to the supply and demand curve, the world price line:
    -If the price of a good in a closed economy > world price, and the economy opens to
    trade, the economy will tend to become a net importer of that good
    +consumer surplus increases by triangular area between, supply demand and world price
    lines
    +producer surplus decreases by area defined between original P *, supply curve, and world
    price
    -If the price of a good in a closed economy < world price, and that economy opens to
    trade, the economy will tend to become a net exporter of that good
    +producer surplus increases by triangular area between, supply demand and world price lines
    +consumer surplus decreases by area between original P *, demand curve, and world price
    Winners and Losers from Trade
    -if groups who are hurt by trade have sufficient political influence, they may persuade politicians to enact
    policies to restrict trade
    -domestic consumers of imported goods benefit from free trade
    -domestic producers of imported goods are hurt by free trade
    -domestic producers of exported goods benefit from free trade
    -domestic consumers of exported goods are hurt by free trade
    -free trade is efficient, increases total economic surplus to economy
    Protectionist Policies: Tariffs and Quotas
    Protectionism: the view that free trade is injurious and should be restricted
    Tariff: tax imposed on an imported good
    -Case Study: Costa Rican computer makers convince government to create tariff on imported
    computers to country
    +World Price is elevated to World Price + Tariff
    +Consumers pay the world price + tariff price, pay more than original world price
    +Producers will be able to raise the price they charge to world price + tariff, increase
    production
    +Total economic surplus decreases by area between world price + tariff, world price, supply,
    and demand
    -Domestic producers suffer losses such that they are willing to gain political support to impose
    tariffs on import
    Quotas: legal limit on the number of foreign goods that can be imported
    -require importers to obtain a license for each good they bring to country, government then
    distributes exactly same numbers of permits as number of goods that may be imported

    -same effect as elevating world price like tariff


    +quantity supplied in market = production of domestic firms plus quota of imported goods
    +shifts supply curve such hat new supply curve = domestic supply curve + quota
    -all prices above world price, quantity is shifted so that new curve reflects addition of
    quota
    +domestic demand curve remains the same
    +equilibrium point at supply curve including quota and demand curve intersection
    -raises the domestic price of good
    -reduces domestic purchase of good
    -increases domestic production of good
    -reduces imports
    -consumer and producer surplus the same as would under a tariff
    -while tariff generates government revenue, the supposed revenue under quota = economic rent for
    people with license
    +licensed firms may purchase good at world price and resell at higher price, thus economic
    rent
    The Inefficiency of Protectionism
    -free trade is efficient: specialization in production to greatest comparative advantage
    -protectionist policies reduce total economic surplus
    -winners of free trade can compensate the losers such that everyone is better off
    +worker assist and retraining programs
    +environmental problems
    Outsourcing: having services performed by low wage workers overseas

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