Chapter 9International Trade

The Determinants of Trade

• Without international trade, domestic supply & domestic demand meet at an equil. price.

• World price = price of a good that prevails in world market

• If world price < domestic price, you import;if world price > domestic price, you export

- Both based on comparative advantage

Winners and Losers from Trade

• Assumption: the country is small compared to world (price takers)

• Example of an Exporting Country

Gains & Losses from Trade

• Exporting country:1. Domestic producers are better off and

domestic consumers are worse off2. Trade raises economic well-being of a nation;

rise in total surplus

Gains & Losses of an Importing Country

• World price below domestic price leads to imports

Winners & Losers

• Importing Country:1. When importing, domestic consumers are

better off, and domestic producers are worse off

2. Trade raises economic well-being of a nation with increased total surplus

• Trade policies expands size of economic pie, but also creates winners & losers

The Effects of a Tariff

• Tariff - tax on imports• Tariff raises price of imports above the world

price (by size of tariff) and pushes it closer to price that would prevail without trade

Effects of a Tariff

• By raising price, it reduces the quantity of imports and moves the market closer to equilibrium without trade

• Domestic sellers are better off, domestic buyers are worse off

• Total surplus has fallen, creating DWL (because a tariff is a tax)

Effects of an Import Quota

• Limit on the quantity of a good that can be produced abroad and sold domestically

• Shifts supply curve to right by size of quota