econ chapter 9

When buyers import goods:

- the price declines to the world price. - the lower price reduces the quantity supplied by domestic sellers and increases the quantity demanded by domestic buyers. - imports fill the gap between supply and demand.

abundant inputs

-Take advantage of what you have to get what you want -Abundance can be due to climate, geography, natural resources and strategic investment

Five arguments for limiting international trade

1. Protecting national security 2. Helping infant industries 3. Preventing unfair competition 4. Enforcing minimum standards 5. Saving jobs

Helping infant industries

A related problem is that as infant industries grow, their political power also increases, leading them to pressure governments to keep renewing their "temporary" assistance. They hoped that once these businesses had learned enough to be globally competitive, they could allow international trade to resume. But the infant industry often fails to grow up

Protecting national security

And sometimes trade limitations will undermine our national security. For example, limiting exports of encryption software actually helped foreign competitors develop encryption technology, by reducing the competition from superior American products. An even broader interpretation suggests that we also need to protect domestic sources of food, so that we can still eat if today's trading partners become tomorrow's enemies.

Cheap imports raise consumer surplus.

Domestic producers lose producer surplus due to foreign competition. The benefits exceed the costs, and imports raise total economic surplus.

What gets traded?

Export stuff you can produce at lowest opportunity cost and import other stuff Trade costs determine whether it's worth buying or selling internationally. Trade costs are extra costs ASIDE FROM PRICE like shipping a car from japan Or paying an extra cost to import a good from government opportunity cost reminds you to consider the full set of costs which means trade costs include the hassle of working across language barriers trading across different time zones dealing with foreign laws and adapting to different ways of doing buisness Cost benefit principle says that reade is only worthwhile if the benefit exceeds the cost Trade costs determine how important international trade is in your sector.

Enforcing minimum standards

For example, U.S. factories can't employ children, they must pay workers at least minimum wage, they must meet environmental standards, and they must follow certain safety precautions to protect both workers and consumers. The argument is that if we prevent unsafe or unethical practices at home, we often want to also hold foreign businesses to the same standards. Opponents argue that the labor or environmental standards that are appropriate for a rich country like the United States are not appropriate for poorer nations. They fear that restricting trade with poor countries can create even more poverty.

A tariff on imported goods will

Increase price which will Decrease quantity demanded by domestic buyers and increase quantity supplied by domestic sellers Causing decrease in imports

Preventing unfair competition

Opponents argue that in practice it's hard to figure out if foreign businesses are dumping their goods to drive out American competitors, or if they're efficient producers offering great prices. For instance, sometimes a foreign company will temporarily charge extremely low prices—effectively "dumping" their goods on the U.S. market—so that they can drive their U.S. competitors out of business. If successful, this would lead to less competition and higher prices in the long run, which would be bad for American consumers. Anti-dumping laws try to prevent this.

effects of globalization

Productivity determines average wages. International trade is raising income inequality within the United States. International trade can have the same effect as immigration.

How imports shape domestic markets

Step one: what will be the price of a traded good? Step two: at this new price what quantities will be demanded and supplied by domestic buyers and sellers? Step three: what quantity will be traded?

Import quotas have similar effects to tariffs, but don't raise revenue.

Tariffs and red tape affect trade because they raise the price of foreign goods, reducing the quantity of international trade. However, setting an import quota would also have the same impact. An import quota limits the quantity of a good that can be imported. For instance, the $4 tariff on shirts in Figure 9 reduces imports to a quantity equal to the width of rectangle E. The government could achieve the exact same outcome—the same price and the same quantity demanded, supplied, and imported—if instead it imposed a quota limiting imports to this number. However with a quota, the government wouldn't raise revenue the way it does with tariffs (unless it auctioned off the scarce import licenses).

How does international trade shape the domestic market?

The domestic demand curve illustrates the quantity of goods that domestic buyers—that is, all Americans taken together—plan to buy at each price. Likewise, the domestic supply curve illustrates the quantity of goods that domestic producers plan to sell at each price.

mass production

These lower opportunity costs due to the benefits of mass production can be another enduring source of comparative advantage, particularly for large producers.

Saving jobs

This suggests that opening up to international trade will have only a temporary effect on unemployment. There's evidence that the tremendous growth of the Chinese manufacturing sector, and the associated rise in Chinese exports, has reduced employment and wages in the American manufacturing sector. And it doesn't yet seem like many of these lost jobs have been replaced by jobs in other sectors, even many years later. So while trade might only have a temporary effect on unemployment, this "temporary" effect may last long enough to be virtually permanent for some people.

World supply and world demand determine the world price.

When the United States is a small player, take the world price as given. Realize that the United States is only a relatively small player in the global shirt market. This means that the actions of American importers and exporters won't influence the world price much. That is, in the world market, American buyers and sellers are price-takers, which means that they can take the world price as given. (Only those who are big players relative to world supply or world demand need to think about how their decisions change the world price.)

Comparative Advantage

You have comparative advantage in a task if you can complete it at a lower opportunity cost than someone else You can't do it all only specialize in what you have the best comparative advantage in Geography is irrelevant. Comparative advantage drives international trade. All you need to do is look at the price tag. When you shop for shirts, the cost-benefit principle tells you to pay careful attention to the price. And in a competitive market, the price is equal to marginal cost. (Yep, that's the marginal principle at work again.) This means that when you compare the price of an imported shirt with the price of the domestically produced shirt, you're effectively comparing their marginal costs. The opportunity cost principle reminds you that marginal cost should include all relevant opportunity costs. This means that when you compare the price of domestic versus imported shirts, you're effectively comparing the opportunity cost of each—and this is exactly what the idea of comparative advantage suggests you should do.

specialized skills

Your unique skills, production methods, or expertise can be an important source of comparative advantage. If you—or a country or a business—focus on a particular product for a long time, you'll likely discover new production techniques that lower your costs. Economists refer to this as "learning by doing," and it explains how a long-term investment in a specific industry can pay off.

Sources of Comparative Advantage

abundant inputs, specialized skills, mass production

Imports lead to

lower prices, less domestic production, and more domestic consumption

Exchange rate manipulation changes the price of your goods in foreign markets.

the price of yuan is low when it takes more yuan to buy a dollar—makes U.S. products more expensive for Chinese buyers. Thus, U.S. producers in both exporting and import-competing industries lose business when China keeps its currency artificially low. On the flipside, U.S. consumers gain from buying Chinese goods at lower prices. In the past, China's government has weakened its currency to increase its exports and reduce its imports, and this policy has been a subject of some controversy.