Chapter 9 Application: International Trade
Exporting Country (when local seller costs is below world price)
When a country allows trade and becomes an exporter of a good, domestic producers of the good are better off, and domestic consumers of the good are worse off
Trade raises the economic wellbeing of the nation, for the gains of the winners exceed the losses of the losers (increasing total surplus)
Importing Country (when local seller costs is above world price)
When a country allows trade and becomes an importer of a good, domestic consumers of the good are better off, and domestic producers of the good are worse off
Trade raises the economic wellbeing of a nation, for the gains of the winners exceed the losses of the losers
Tariffs - a tax on goods produced abroad and sold domestically
reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade
raises the price of steel that domestic producers can charge above the world price, encouraging production of steel
raises the price that domestic steel buyers have to pay and encourages them to reduce consumption of steel
Import Quota - a limit on the quantity of a good produced abroad that can be sold domestically
Benefits of International Trade Increased variety of goods
Lower costs through economies of scale Increased competition
Enhanced flow of ideas Arguments of restricting trade
The jobs argument
cause price of steel to fall, reducing the quantity of steel produced thus reducing employment in the Isolandian steel industry
creates job at the same time, allows us to enjoy a higher standard of living National security argument
Infant industry argument Unfair competition argument
Protection-as-a-bargaining chip argument
The effects of free trade can be determined by comparing the domestic price without trade with the world price. A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer
