extremely competitive markets part 2: open economies
Post on 19-Dec-2015
222 views
TRANSCRIPT
![Page 1: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/1.jpg)
Extremely Competitive MarketsPart 2: Open Economies
![Page 2: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/2.jpg)
Closed Economy: Equilibrium Without Trade
Price of Steel
EquilibriumPrice
0 Quantity of SteelEquilibrium Quantity
Domestic Supply
Domestic Demand
![Page 3: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/3.jpg)
Priceof Steel
0 Quantityof Steel
DomesticDemand
Open Economy: If world price > domestic price, country becomes an exporter
DomesticSupply
WorldPrice
Price after trade
Exports
Domesticdemand
Domestic supply
Price before trade
![Page 4: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/4.jpg)
Exporting Country:Who are the winners and who are the losers?
Domestic producers
Domestic consumers
Foreign producers
Foreign consumers
Domestic and foreign governments
![Page 5: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/5.jpg)
Priceof Steel
0 Quantityof Steel
WorldPrice
Domestic demand
Who are the Winners and Who are the Losers?
DomesticSupply
Price after trade
Price before trade
Consumer surplusafter trade
C
Producer surplusafter trade
D
Exports
B
![Page 6: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/6.jpg)
If world price < domestic price: country becomes an importer
Priceof Steel
0 Quantityof Steel
Domestic Supply
Domestic demand
World Price
Price after trade
DomesticquantitySupplied
DomesticquantityDemanded
Price before trade
Imports
![Page 7: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/7.jpg)
Importing Country:Who are the winners and who are the losers?
Domestic producers
Domestic consumers
Foreign producers
Foreign consumers
Domestic and foreign governments
![Page 8: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/8.jpg)
Who are the Winners and Who are the Losers?
Priceof Steel
0 Quantityof Steel
Domestic supply
World Price
Domestic demand
Price after trade
Price before trade
A
Consumer surplusafter trade
B D
CProducer surplus
after trade
Imports
![Page 9: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/9.jpg)
Gains and Losses from Free International Trade:
1. In each country, gains to winners exceed losses to losers
2. Therefore overall economic welfare increases
3. Also, can lead to:
Increased variety of goods and service
Lower costs through economies of scale
Increased competition and efficiency
Enhanced flow of ideas
4. But, losing producers have a strong incentive to oppose free trade through:
Tariffs
Quotas
Subsidies
![Page 10: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/10.jpg)
Price with tariff
World price
Price w/o tariff
Effect of an Import Tariff on Price, Quantity of Imports and Gov Revenue
Priceof Steel
0 Quantityof Steel
Domestic supply
Domestic demand
Tariff
Q1S Q1
D
Imports without tariff
Imports with tariff
Q2DQ2
S
Gov tariff rev
![Page 11: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/11.jpg)
Price with quota
World price
Price without quota
The Effects of an Import Quotaon Price and Quantity of Imports
Priceof Steel
0 Quantityof Steel
Domestic supply
Domestic demand
Q1S Q2
S Q2D
Imports without quota
Importswith quota
Domestic supply +Import Supply
Quota
Q1D
![Page 12: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/12.jpg)
World price
The Effects of an Production Subsidy on Price and Quantity of Imports
Priceof Steel
0 Quantityof Steel
Domestic supply
Domestic demand
Imports
Production subsidy
Price (to producers) with subsidy
Qs Qd
![Page 13: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/13.jpg)
Effect of Large Domestic Subsidies on World Market Price
Q/t0
P/Q
D
S
S’
Q2
P2
P1
Q1
![Page 14: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/14.jpg)
So, what are the arguments for restricting trade?
![Page 15: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/15.jpg)
Protect Domestic Production & Jobs
![Page 16: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/16.jpg)
Protect National Security
![Page 17: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/17.jpg)
Infant Industry Protection
![Page 18: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/18.jpg)
Protection as a Bargaining Chip
![Page 19: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/19.jpg)
Protection/Retaliation Against “Unfair” Competition
Resulting From:
Tariffs
Subsidies
Quotas
Dumping
“Manipulation of” exchange rates
![Page 20: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/20.jpg)
Macroeconomic Stability
![Page 21: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/21.jpg)
Environmental/Health/Cultural Human Rights ConsiderationsEnvironmental/Health/Cultural Human Rights Considerations
![Page 22: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/22.jpg)
International Trade Liberalization AgreementsInternational Trade Liberalization AgreementsBilateral Agreements:North American Free Trade Agreement(1993)
US China WTO Agreement (1999)
General Agreement on Tariffs and Trade (GATT): Reduced average tariff among member countries from 40% after WWII to < 5% today.
World Trade Organization (WTO)1. Promotes trade liberalization, where appropriate2. Approves retaliatory actions with regard to “illegal”
trade barriers.
![Page 23: Extremely Competitive Markets Part 2: Open Economies](https://reader030.vdocuments.net/reader030/viewer/2022032703/56649d385503460f94a11c39/html5/thumbnails/23.jpg)
WTO Rulings Retaliatory Tariffs
$2 billion $300 million €200 million
EU/US Steel Brazil/US Cotton US/EU Bananas