sss/Principles of Microeconomics

Spring 2019 Prin iples of Mi roe onomi s T. Tung

Part IX

International Trade:

� As demonstrated in Chapter 3, trade bene�ts individuals in an e onomy � We an apply the same logi to

international trade.

� We an use the tools we have learned (supply, demand, equilibrium, onsumer surplus, produ er surplus) to

demonstrate the winners and the losers from international trade:

The Equilibrium without Trade:

� Textiles represent a market with deep appli ations to international trade: textiles are produ ed throughout

the world and represent a good that is easily exported and imported.

� Analysis begins with an isolated ountry in equilibrium maximizing onsumer surplus and produ er surplus:

The World Pri e and Comparative Advantage:

� World Pri e: The pri e of a good that prevails in the world market for that good.

� If the world pri e is higher than the lo al pri e in a ountry, sellers will export their goods to other

ountries in the world

� If the world pri e is lower than the lo al pri e in a ountry, buyers will import the good from other

ountries in the world

� When the domesti ountry has a lower pri e than the world, this is an indi ator of omparative advan-

tage. This is due to the omparatively lower ost in the ountry.

The Winners and Losers from Trade:

� Key Assumption: Lo al ountry is small ompared to the world. This means that this ountry's a tions have

little impa t on world markets.

� Thus, individuals in the lo al ountry are pri e takers.

� A graph fully demonstrates the winners and the losers from international trade in the ase of a world pri e

that is higher than the lo al pri e:

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Spring 2019 Prin iples of Mi roe onomi s T. Tung

� When the world pri e is greater than the lo al pri e, the lo al pri e will in rease until the world pri e is met.

� On e trade is allowed, the domesti pri e rises to equal the world pri e.

� In any trade situations, there are lear winners and losers:

� Produ ers gain from exporting to the world market. Surplus is transferred from onsumers to produ ers.

Additionally, produ ers also gain from exporting to other ountries.

� The pri e domesti onsumers pay rise � onsumers are worse o�

� However, the bene�ts to produ ers are larger than the losses to onsumers. Thus, the overall e onomi

well-being of the nation improves.

A graph fully demonstrates the winners and the losers from international trade in the ase of a world pri e that

is lower than the lo al pri e:

� The horizontal world pri e line is perfe tly elasti . Citizens of the lo al ountry an buy as many textiles as

they want at the world pri e.

� Graphi al analysis an determine the winners and the losers from this s enario:

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Spring 2019 Prin iples of Mi roe onomi s T. Tung

� Buyers will no longer pur hase goods from lo al sellers at the lo al pri e: The domesti pri e de reases to the

world pri e.

� In this trade situation, there are lear winners and losers:

� Consumers gain from importing textiles from the world. Surplus is transferred from produ ers to on-

sumers.

� The pri e domesti produ ers re eive is lower - produ ers are worse o�.

� Consumer gain more than produ ers lose. Thus, the overall e onomi well-being of the ountry is

improved.

The E�e ts of a Tari�

� Tari�: A tax on goods produ ed abroad and sold domesti ally.

� Now, the ost of importing textiles from the world has in reased and is re�e ted in the following graph:

� The tari� redu es the quantity of imports and moves the domesti market loser to its equilibrium without

trade.

� Though this out omes may seem positive, sin e it introdu es deadweight loss into the market, it is not a

preferable situation.

� Tari�s distort in entives and auses a deadweight loss in the market. (Sin e a tari� is a tax as well).

Other Bene�ts of International Trade:

1. In reased variety of goods

2. Lowers osts through e onomies of s ale

(a) E onomies of s ales o urs when produ tivity rises due to in reasing the amount of produ tion (small

household operation vs. large fa tory). When the world is available as onsumers, produ ers have the

opportunity to in rease produ tion and gain e onomies of s ale

3. In reased ompetition

4. Enhan ed �ow of ideas

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Spring 2019 Prin iples of Mi roe onomi s T. Tung

(a) The transfer of te hnologi al advan es as a result of trading goods

The Arguments for Restri ting Trade:

1. The Jobs Argument

� Domesti produ ers lose when the world pri e is below the domesti pri e. Thus, employment in the

domesti region industry will fall. However, the in rease in in ome in the foreign ountry an be used

to pur hase imports from other domesti produ ers. Ultimately, sin e omparative advantage drives

spe ialization and trade the gains from winners will over ome the loss from losers

2. The National-Se urity Argument

3. The Infant-Industry Argument

� New industries often ask for prote tion from foreign ompetition through restri tions of trade. This gives

them time to establish themselves. Additionally, members of an established industry may ask for trade

restri tions in response to new onditions or a serious hange in the industry.

4. The Unfair-Competition Argument

� Subsidies give produ ers in ertain ountries the ability to produ e at a lower ost. Is this far? Ultimately,

the gains from the onsumers in the domesti ountry outweigh the losses to the produ ers

5. The Prote tion-as-a Bargaining Chip

� Threats to restri t trade for poli ymakers may be ine�e tive. The result is the restri tion of trade with

no bene�t.

E onomists generally disagree with trade restri tions � The entity(s) that possesses the omparative

advantage should produ e that good. This is the e� ient outlook a ording to e onomi theory.

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