Chapter 7 - Why do countries restrict foreign trade? After completing this chapter, students will be able to: Review the partial equilibrium, general equilibrium, and growth models and distinguish the distribution of the welfare gains and losses from international trade, explain the strategic trade and infant industry arguments for protection, distinguish the assumptions that must be satisfied for the strategic trade and infant industry arguments for protection to be valid. | Why Do Governments Restrict Trade? I think an American private citizen or an American company should have the right to visit any place on earth and the right to trade with any other purchaser or supplier on earth. (Jimmy Carter, 2002) The Goals of This Chapter Review the partial equilibrium, general equilibrium, and growth models and distinguish the distribution of the welfare gains and losses from international trade. Explain the strategic trade and infant industry arguments for protection. Distinguish the assumptions that must be satisfied for the strategic trade and infant industry arguments for protection to be valid. Introduce the political economy models that can help to explain trade policy. The General Equilibrium Effects of Trade The shift to free trade means that the economy specializes in the production of Y, and production shifts from A to P. The movement of factors from one industry to another implies moving expenses and other costly adjustments. Even if factors do move quickly and with few adjustment costs, their prices will change, thereby changing the incomes of their owners. A sudden change in relative prices from P to Pw may, in the short run, greatly reduce production of X but not increase output of Y very much. Production thus moves to Ps, below the PPF. Output of X falls from h to m, and output of Y rises only slightly from g to f. When production moves to Ps, below the PPF, the best consumers can do is to consume at Cs. With production at Ps, the economy can no longer reach even the no-trade indifference curve. Thus, in the short run a shift to free trade may reduce welfare! Only in the long run does the economy reach the standard free trade triangle linking points P and C. The orange arrows trade dynamic paths from A to P and from A to C. In the short run, welfare declines, in the long run it rises from its pre-trade level. The dynamic path of trade and specialization after trade liberalization implies a gradually changing trade pattern. In . | Why Do Governments Restrict Trade? I think an American private citizen or an American company should have the right to visit any place on earth and the right to trade with any other purchaser or supplier on earth. (Jimmy Carter, 2002) The Goals of This Chapter Review the partial equilibrium, general equilibrium, and growth models and distinguish the distribution of the welfare gains and losses from international trade. Explain the strategic trade and infant industry arguments for protection. Distinguish the assumptions that must be satisfied for the strategic trade and infant industry arguments for protection to be valid. Introduce the political economy models that can help to explain trade policy. The General Equilibrium Effects of Trade The shift to free trade means that the economy specializes in the production of Y, and production shifts from A to P. The movement of factors from one industry to another implies moving expenses and other costly adjustments. Even if factors do move .
