globalization and international trade lecture 8 – academic year 2014/15 introduction to economics...

Globalization and International Trade

Lecture 8 – academic year 2014/15

Introduction to EconomicsFabio Landini

22

What do we do today?

• Lect. 8: the welfare effects of globalization

• Lect. 8: is it convenient to impose a tax on Chinese shoes imported in Europe? If so, convenient for whom?

33

Question of the day

Who made our shoes?

44

Globalization

What’s “globalization”?

Process of growing economic and financial, e.g. exchange of goods and financial activities (assets).

We ask:

• Which are the effects of globalization on welfare?

• Who gain and who looses from the free trade among nations?

55

World exports of goods(Billions US $ x 1000)

02468

1012141618

European Union (15) World

Updating… the crisis

77

Equilibrium in the absence of international exchanges

Economy without international exchanges (“closed”): the price adjusts so as to equalize internal demand and supply.

8

Equilibrium in the absence of exchanges

Price of steel

Equilibrium price

0 Quantity of steelEquilibriumquantity

Internal supply

Internal demand

Consumer surplus

Producer surplus

99

EXAMPLE – Market for steel

Hypotheses:

•A country that is not in contact with the rest of the world and produces steel.

•The market for steel consists of producers and consumers of that country.

Equilibrium in the absence of exchanges

1010

Opening to international trade: questions

If a country opens to international trade, what happens to exporters and importers of steel?

Who gains and who looses from the opening of the market (= globalization)?

Are the gains of some compensated by the losses of the others?

1111

Baseline hypothesis: the country is SMALL in the world market.

Hence: it behaves like consumers and producers under perfect competition.

Take the world price as a given.

The country decides whether to sell or buy steel to/from the world market.

Opening to international trade

1212

World price and comparative advantage

If a country has a “comparative advantage” in the production of a good,

then: internal price < global price

– why? Price= opportunity cost

In this case: the country becomes an exporter of that good

1313

If a country does not have a “comparative advantage”,

then internal price > global price.

In this case: the country becomes exporter of that good

World price and comparative advantage

1414

International trade in an importing country

If global p < internal p,

“once the borders are opened”, the country becomes an importer of steel.

Key question: who do the consumers want to buy from (given that they are free to choose) ?

1515

Price of steelPrice of steel

Price in a closed Price in a closed economyeconomy

00 Quantity of steelQuantity of steel

Internal supplyInternal supply

Internal demandInternal demand

World priceWorld price


1616

Internal consumers want to buy steel at a lower price.

– For small quantities, the most efficient among the internal producers can satisfy demand

– For larger quantities, the internal producers are too inefficient compared to foreign competitors and imports


1717







Internalquantitysupplied

Internalquantitydemanded

Import


1818

Import=

Internal quantity demanded – internal quantity supplied, at the world price.

Internal price until internal p = global p

Internal consumption and internal production i.e., the country becomes an importer of steel.


1919








Consumer surplus in a closed economy

AA

Import

2020







Consumer surplus in a closed economy

AA

C

B

World priceWorld priceImport

Produce surplus in aclosed economy

2121







Consumer surplus in a open economy

AA


B D

2222








AA


B D

Produce surplus in aopen economy

C

2323








AA


B

Produce surplus in aopen economy

C

Additional surplus in an open economy

D

2424

Gains and losses from free trade

When a country opens its frontiers to free trade becoming an importer, its consumers gain.

They pay a lower price and can buy more.

The national producers, instead, are damaged.

They receive a lower price and sell less units.

2525

Overall, international trade increases the total welfare of the country.

The net variation of total welfare (surplus) is positive

The gains of consumers are greater than the losses of producers.

Gains and losses from free trade

2626

The effects of a custom duty

A custom duty is a tax on a good produced abroad and imported.

A custom duty increases the global price proportionally.

2727

National producers take advantage of the duty, while consumers experience a loss.


2828





Import without Import without dutyduty


QQSS11QQ QQQQDD

11


Price without Price without dutyduty

2929







QQSS11QQ QQQQDD

11


Consumer surpluswithout duty

Producer surplus Without duty


3030







QQSS11QQ QQQQDD

11



3131







QQSS11QQ QQQQDD

11


Price with dutyDuty

QS2 QD

2


3232







Price with dutyDuty

QS2 QD

2

Price without Price without dutyduty Import with

duty

QQ QQDD11

3333







Price with dutyDuty

QS2 QD

2


QQ QQDD11


Producer surplus with duty

3434







Price with dutyDuty

QS2 QD

2


QQ QQDD11



Public revenue

3535







Price with dutyDuty

QS2 QD

2


QQ QQDD11



Net loss due to the dutyNet loss due to the duty

Public revenue

3636

As any other tax, a duty creates a distortion in incentives and affects the optimal allocation of resources


3737

The argument in favour of restrictions to free trade

• Employment

• National security

• Infant industry protection

• Dumping

• Protectionism as bargaining tool

3838

Hence

Through the comparison between internal price and world price one can identify which countries are exporters and which are importers of a particular good.

3939

Globalization means:

In exporting countries, producers gains, while consumers loose.

In importing countries, consumers gain, while producers loose.

In both cases gains are greater than losses.

4040

Conclusion

The custom duty. . .

•Increases the national price of a good.

•Reduces the welfare of internal consumers

•Increases the welfare of internal producers

•Creates a net loss in terms of welfare

globalization and international trade lecture 8 – academic year 2014/15 introduction to economics...

Documents

price of steel price

internal price global

international trade

lower price

importing country slide

good world price

internal producers

internal consumers