Application,
International Trade
Chapter 9
International Trade
What determines whether a country
imports or exports a good?
Who gains and who loses from free trade
among countries?
What are the arguments that people used
to advocate trade restrictions?
Equilibrium without Trade
Assume:
A country is isolated from rest of the
world and process steel.
The market for steel consists of the buyers
and sellers in the country.
No one in the country is allowed to import
or export steel.
Equilibrium without Trade
Priceof Steel
EquilibriumPrice
0 Quantityof SteelEquilibriumquantity
Domestic
supply
Domestic
demand
Producersurplus
Consumersurplus
Equilibrium without Trade
Results:
Domestic price adjusts to balance demand
and supply.
The sum of consumer and producer
surplus measures the total benefits that
buyers and sellers receive.
World Price and
Comparative Advantage
If the country decides to engage in
international trade,will it be an importer or
exporter of steel?
The effects of free trade can be shown by
comparing the domestic price of a good
without trade and the world price of the
good,The world price refers to the
prevailing price in the world markets.
A country will either be an exporter or an
importer of the good.
If a country has a comparative advantage,
then the domestic price will be below the
world price,and the country will be an
exporter of the good.
If the country does not have a comparative
advantage,then the domestic price will be
higher than the world price,and the
country will be an importer of the good.
World Price and
Comparative Advantage
Priceof Steel
0 Quantityof Steel
Domestic
demand
International Trade in an
Exporting Country...
Domestic
supply
World
price
Price after
trade
Exports
Domestic
quantity
demanded
Domestic
quantity
supplied
Price before
trade
Priceof Steel
0 Quantityof Steel
World
price
Domestic
demand
How Free Trade Affects Welfare
in an Exporting Country...
Domestic
supply
Price after
trade
Price before
trade
A
Consumer surplus
before trade
B
C
Producer surplus
before trade
Priceof Steel
0 Quantityof Steel
World
price
Domestic
demand
Domestic
supply
Price after
trade
Price before
trade
A
Consumer surplus
after trade
C
B
Producer surplus
after trade
D
Exports
How Free Trade Affects Welfare
in an Exporting Country...
Changes in Welfare from Free
Trade,Exporting Country
The area D shows the increase in total surplus
and represents the gains from trade.
Before Trade After Trade Change
Consumer Surplus A + B A - B
Producer Surplus C B + C + D + (B + D)
Total Surplus A + B + C A + B + C + D + D
The analysis of an exporting country yields
two conclusions:
Domestic producers of the good are better
off,and domestic consumers of the good
are worse off.
Trade raises the economic well-being of
the nation as a whole.
How Free Trade Affects Welfare
in an Exporting Country...
International Trade and
the Importing Country
If the world price of steel is lower than the
domestic price,the country will be an
importer of steel when trade is permitted.
Domestic consumers will want to buy
steel at the lower world price.
Domestic producers of steel will have to
lower their output because the domestic
price moves to the world price.
Priceof Steel
0 Quantityof Steel
Domestic
supply
Domestic
demand
World
PricePrice after trade
Domestic
quantity
supplied
Domestic
quantity
demanded
Price before
trade
Imports
International Trade and
the Importing Country
How Free Trade Affects Welfare
in an Importing Country...
Priceof Steel
0 Quantity
of Steel
Domestic
supply
World
Price
Domestic
demand
Price after
trade
Price before
trade
A
Consumer surplus
before trade
C
B
Producer surplus
before trade
Priceof Steel
0 Quantity
of Steel
Domestic
supply
World
Price
Domestic
demand
Price after
trade
Price before
trade
A
Consumer surplus
after trade
B D
C
Producer surplus
after trade
Imports
How Free Trade Affects Welfare
in an Importing Country...
Changes in Welfare from Free
Trade,Importing Country
The area D shows the increase in total surplus
and represents the gains from trade.
Before Trade After Trade Change
Consumer Surplus A A + B + D + (B + D)
Producer Surplus B + C C - B
Total Surplus A + B + C A + B + C + D + D
The analysis of an importing country
yields two conclusions:
Domestic producers of the good are
worse off,and domestic consumers of the
good are better off.
Trade raises the economic well-being of
the nation as a whole because the gains of
consumers exceed the losses of producers.
How Free Trade Affects Welfare
in an Importing Country...
The Gains and Losses from
Free International Trade
The gains of the winners exceed the
losses of the losers.
The net change in total surplus is
positive.
Tariffs
Tariffs are taxes on imported goods
Tariffs raise the price of imported goods
above the world price by the amount of
the tariff.
Price with
tariff
World
price
Price without
tariff
The Effects of a Tariff...
Priceof Steel
0 Quantityof Steel
Domestic
supply
Domestic
demand
Tariff
Q1S Q1D
Imports without tariff
Imports
with tariff
Q2DQ2S
The Effects of a Tariff...
Priceof Steel
0 Quantityof Steel
Domestic
supply
Domestic
demand
World
price
Q1S Q1D
Price without
tariff
Imports without tariff
Consumer surplus
before tariff
Producer surplus
before tariff
The Effects of a Tariff...
Priceof Steel
0 Quantityof Steel
Domestic
supply
Domestic
demand
Tariff World
price
Q1S Q2S Q2D Q1D
Price without
tariff
Price with
tariff
Imports without tariff
Imports
with tariff
A
Consumer surplus
with tariff
B
C
G
Producer surplus
before tariff
Priceof Steel
0 Quantityof Steel
Domestic
supply
Domestic
demand
Tariff World
price
Q1S Q2S Q2D Q1D
Imports without tariff
Imports
with tariff
E
Tariff revenue
Price with
tariff
Price without
tariff
The Effects of a Tariff...
Priceof Steel
0 Quantityof Steel
Domestic
supply
Domestic
demand
Tariff World
price
Q1S Q2S Q2D Q1D
Price without
tariff
Price with
tariff
Imports without tariff
Imports
with tariff
A
B
C E
G
D F
Deadweight loss
The Effects of a Tariff...
Changes in Welfare from a Tariff
Before Tariff After Tariff Change
Consumer Surplus A+B+C+D+E+F A + B - (C+D+E+F)
Producer Surplus G C + G + C
Government
Revenue
None E + E
Total Surplus A+B+C+D+E+F+G A+B+ C+ E+ G - (D + F)
The area D+F shows the fall in total surplus and
represents the deadweight loss of the tariff.
A tariff reduces the quantity of imports
and moves the domestic market closer to
its equilibrium without trade.
With a tariff,total surplus in the market
decreases by an amount referred to as a
deadweight loss.
The Effects of a Tariff...
The Effects of an Import Quota
An import quota is a limit on the quantity of
imports.
Because the quota raises the domestic price
above the world price,domestic buyers of the
good are worse off,and domestic sellers of the
good are better off.
License holders are better off because they make
a profit from buying at the world price and
selling at the higher domestic price.
Price with
quota
World
price
Price without
quota
Priceof Steel
0 Quantityof Steel
Domestic
supply
Domestic
demand
Q1S Q2S Q2D
Imports without quota
Imports
with quota
Domestic supply
+
Import SupplyQuota
Equilibriu
m with
quota
Equilibrium
without trade
Q1D
The Effects of an Import Quota
Priceof Steel
0 Quantityof Steel
Domestic
supply
Domestic
demand
World
price
Q1S Q2S Q2D Q1D
Price without
quota
Price with
quota
Imports without quota
Imports
with quota
Domestic supply
+
Import SupplyQuotaA
B
C E' E'' F
G
D
The Effects of an Import Quota
With a quota,total surplus in the market
decreases by an amount referred to as a
deadweight loss.
The quota can potentially cause an even larger
deadweight loss,if a mechanism such as
lobbying is employed to allocate the import
licenses.
If government sells import licenses for full value,
revenue equals that of equivalent tariff and the
results of tariffs and quotas are identical.
The Effects of an Import Quota
Both Tariffs and Import Quotas
raise domestic prices.
reduce the welfare of domestic consumers.
increase the welfare of domestic producers.
cause deadweight losses.
Other Benefits of International Trade
Increased variety of goods
Lower costs through economies of scale
Increased competition
Enhanced flow of ideas
The Arguments for
Restricting Trade
Jobs
National Security
Infant Industry
Unfair Competition
Protection as a Bargaining Chip
Trade Agreements
Unilateral,when a country removes its
trade restrictions on its own.
Multilateral,a country reduces its trade
restrictions while other countries do the
same.
EU
NAFTA
GATT or WTO
Summary
The effects of free trade can be determined by
comparing the domestic price without trade to
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.
When a country allows trade and becomes an
exporter of a good,producers of the good are
better off,and consumers of the good are worse
off.
When a country allows trade and becomes an
importer of a good,consumers of the good are
better off,and producers are worse off.
A tariff – a tax on imports – moves a market
closer to the equilibrium than would exist
without trade,and therefore reduces the gains
from trade.
Summary
Import quotas will have effects similar to those
of tariffs.
There are various arguments for restricting trade,
protecting jobs,defending national security,
helping infant industries,preventing unfair
competition,and responding to foreign trade
restrictions.
Economists,however,believe that free trade is
usually the better policy.
Summary
Exercise #9
Problems and Applications:
– #5,#7,#10,#12
Question #8 is not required,but it
provides good topics for discussion.
经济学可以更有趣
进口配额和出口配额，哪个更愚蠢？
既然贸易壁垒（关税、进口配额）这么有害，为什么贸易保护政策还这么受欢迎？
你身边有多少求助于贸易保护的例子？
,被遗忘的人”
– 当 A觉察到，那种做法是错误的，害得 X因此遭受苦难，
于是立即和 B谈这件事，两人接着提议立法，矫正那种错误的做法，以此来帮助 X。他们通过的法律，总是规定 C
应该为 X做什么事，更好的情况则是 A,B和 C应该为 X做什么事 …… 我想做的事，是探访一下 C…… 我称他为“被遗忘的人” …… 他是从来不被考虑的人。他是被改革者、
社会投机者和慈善家所牺牲的人。我希望将他的特征和加在他身上的各种负担展示给你们，以得到你们的注意。 ——William Graham Sumner,1883