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Lecture International economics: Chapter 4 - Hendrik Van den Berg

Chapter 4 - Why nations trade: A partial equilibrium view. After completing this chapter, students will be able to: Introduce a two-country partial equilibrium model of international trade; use the partial equilibrium model to illustrate how consumers and producers are affected by international trade; use the partial equilibrium model to analyze the effects of exchange rate changes, changes in demand, and transportation costs;. | Why Nations Trade: A Partial Equilibrium View Nothing is accomplished until someone sells something. (popular business saying) The Goals of this Chapter Introduce a two-country partial equilibrium model of international trade. Use the partial equilibrium model to illustrate how consumers and producers are affected by international trade. Use the partial equilibrium model to analyze the effects of exchange rate changes, changes in demand, and transportation costs. Introduce international marketing and show how it complements comparative advantage by helping to determine the value of products that are traded internationally. Explain how the need for international marketing introduces a fixed cost to international trade that tends to prevent the smooth adjustments predicted by the standard international trade models. Measuring the Welfare Gains from Exchange: Producer Surplus and Consumer Surplus Producer surplus: The net gains to producers of a product, equal to the total revenue minus the sum of marginal (variable) costs. Consumer surplus: The net gains for consumers of a product, equal to the sum of all marginal gains minus the market price paid for the products. Equilibrium price = $6 Equilibrium quantity = 50 Equilibrium price = $6* Equilibrium quantity = 50 Producer surplus = $125 ($5x50 = $250/2 = $125) Equilibrium price = $6 Equilibrium quantity = 50 Producer surplus = $125 ($5x50/2 = $250/2 = $125) Consumer surplus = $75 (3x50/2 = $150/2 = $75) Equilibrium price = $6 Equilibrium quantity = 50 Producer surplus = ($5x50)/2 = $250/2 = $125 Consumer surplus = $75 ($3x50)/2 = $150/2 = $75 Total gains from exchange equals consumer surplus plus producer surplus Gains from exchange = ($8x50)/2 = $400/2 = $200 The Two-Country Partial equilibrium Model The textbook emphasizes two-country models in order to remind you that what happens in one country affects markets in other countries. Partial equilibrium models assume “all other things remain equal” in other markets, . | Why Nations Trade: A Partial Equilibrium View Nothing is accomplished until someone sells something. (popular business saying) The Goals of this Chapter Introduce a two-country partial equilibrium model of international trade. Use the partial equilibrium model to illustrate how consumers and producers are affected by international trade. Use the partial equilibrium model to analyze the effects of exchange rate changes, changes in demand, and transportation costs. Introduce international marketing and show how it complements comparative advantage by helping to determine the value of products that are traded internationally. Explain how the need for international marketing introduces a fixed cost to international trade that tends to prevent the smooth adjustments predicted by the standard international trade models. Measuring the Welfare Gains from Exchange: Producer Surplus and Consumer Surplus Producer surplus: The net gains to producers of a product, equal to the total revenue minus