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Lecture Principles of economics - Chapter 9: Application: International trade

We now return to the study of international trade and take up these questions. Over the past several chapters, we have developed many tools for analyzing how markets work: supply, demand, equilibrium, consumer surplus, producer surplus, and so on. With these tools we can learn more about the effects of international trade on economic well-being. | 9 Application: 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 use to advocate trade restrictions? THE DETERMINANTS OF TRADE Equilibrium Without Trade Assume: A country is isolated from rest of the world and produces 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. Figure 1The Equilibrium without International Trade Copyright © 2004 South-Western Consumer surplus Producer surplus Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Equilibrium price Equilibrium quantity The Equilibrium Without International Trade 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. The World Price and Comparative Advantage If the country . | 9 Application: 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 use to advocate trade restrictions? THE DETERMINANTS OF TRADE Equilibrium Without Trade Assume: A country is isolated from rest of the world and produces 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. Figure 1The Equilibrium without International Trade Copyright © 2004 South-Western Consumer surplus Producer surplus Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Equilibrium price Equilibrium quantity The Equilibrium Without International Trade 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. The World Price and Comparative Advantage If the country decides to engage in international trade, will it be an importer or exporter of steel? The World Price and Comparative Advantage 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 price that prevails in the world market for that good. The World Price and Comparative Advantage 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. The World Price and Comparative Advantage 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. Figure 2 International Trade in an Exporting Country Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Domestic supply Price after trade World price Domestic demand Exports Price before trade Domestic quantity demanded Domestic quantity supplied Figure