Benefits of and Arguments Against International Trade

With very elastic supply and very inelastic demand, the burden of the tax will be borne largely by the

buyers

What is this an example of? The transfer of technological advances around the world is often thought to be linked to the exchange of the goods that embody those advances. The best way for a poor agricultural nation to learn about the computer revolution, for instance, is to buy some computers from abroad rather than trying to make them domestically.

Enhanced flow of ideas

True or False Domestic producers of an imported good can benefit if domestic supply is perfectly inelastic.

False

True or False If demand is perfectly inelastic, consumers do not benefit from trade.

False

True or False If demand is perfectly inelastic, there are no gains from trade.

False

True or False When the supply of goods is perfectly elastic, the government can raise tax revenue without creating deadweight loss by taxing the consumers.

False

True or False The greater the elasticity of domestic demand for the good it exports, the greater the rise in consumer surplus from trade.

False

What is this an example of? Some goods can be produced at a low cost only if they are produced in large quantities. A firm in a small country cannot take full advantage of this phenomenon if it can sell only a small domestic market. Free trade gives firms access to larger world markets, allowing them to realize this phenomena more fully.

Lower costs through economies of scale

What are the 5 arguments against international trade?

1) The Jobs Argument 2) The National-Security Argument 3) The Infant-Industry Argument 4) The Unfair-Competition Argument 5) The Protection-as-a-Bargaining-Chip Argument

What are the 5 benefits of international trade?

1. Increased variety of goods 2. Lower costs through economies of scale. 3. Increased competition 4. Increased productivity 5. Enhanced flow of ideas

What is this an example of? A company shielded from foreign competitors is more likely to have market power, which in turn gives it the ability to raise price above competitive levels. This is a type of market failure. Opening up trade fosters competition and gives the invisible hand a better chance to work its magic.

Increased competition

What is this an example of? Without free trade, Rooby has market power as a local producer. Once free trade is implemented in the local economy, Rooby is no longer able to raise its prices above competitive levels.

Increased competition

What is this an example of? When a nation opens up to international trade, the most productive firms expand their markets while the least productive are forced out by increased competition. As resources move from the least to the most productive firms, overall productivity rises.

Increased productivity

What is this an example of? Good produced in different countries are not exactly the same. German beer, for instance, is not the same as American beer. Free trade gives consumers in all countries a greater variety to choose from.

Increased variety of goods

Tabletop Ltd. is a firm operating in a small economy. If Tabletop Ltd. can produce more goods, it can do so at a lower cost per unit. When the economy itself opens up to international trade, Tabletop Ltd. is able to enjoy these lower costs since it can now serve a larger market.

Lower costs through economies of scale.

What is this an example of? A political pundit argues that the government should impose a tariff on semiconductors because they are a necessary input into the production of various weapons. Free trade, she contend, would make the US overly dependent on foreign countries for the supply of semiconductors and thus, in case of wat, unable to make enough weapons to defend itself.

National-Security Argument

New industries sometimes argue for temporary trade restrictions to help them get started. After a period of protection, the argument goes, these industries will mature and be able to compete with foreign firms.

The Infant-Industry Argument

Opponents of free trade often argue that trade with other countries destroys domestic jobs.

The Jobs Argument

What is this an example of? We should place a tariff on Chinese-made tries to help prevent domestic tire employers from being laid off.

The Jobs Argument

What is this an example of? We should place a tariff on the importation of oil and instead produce it domestically to avoid overdependence on foreign supply.

The National-Security Argument

When an industry is threatened with competition from other countries, opponents of free trade often argue that the industry is vital to national security.

The National-Security Argument

Another argument for trade restrictions concerns the strategy of bargaining. Many policymakers claim to support free trade, but at the same time, argue that trade restrictions can be useful when we bargain with our trading partners.

The Protection-as-a-Bargaining-Chip Argument

What is this an example of? We should limit the importation of Japanese automobiles unless Japan reduces its restrictions on agricultural imports.

The Protection-as-a-Bargaining-Chip Argument

A common argument is that free trade is desirable only if all countries play by the same rules. If firms in a different country are subject to different regulations, then it is unfair (as the argument goes) to expect to compete in the international marketplace.

The Unfair-Competition Argument

What is this an example of? We should subsidize our textile industry because Vietnam subsidized its textile industry.

The Unfair-Competition Argument

True or False A tax on food leads to relatively little deadweight loss because people are not very sensitive to the price in this market.

True

True or False A tax raises no revenue for the government can create deadweight loss.

True

True or False Consumers can still benefit from imports even if domestic demand is perfectly inelastic.

True

True or False Taxing food is a bad way to raise revenue from an equality point of view because poor people send a higher proportion of their income on food.

True

True or False The greater the elasticity of demand, the greater the gains from trade.

True

What is this an example of? A congresswoman from a state with several ball-bearing factories argues that the US should threaten to impose a tariff on Chinese ball bearings in order to induce the Chinese to remove its tariff on American cars.

Using-Protection-as-a-Bargaining-Chip Argument

With very inelastic supply and very elastic demand, the burden of the tax will be born largely by the

sellers