Econ Ch. 9

Price taker

a small economy that has no effect on world price

tariff

a tax on imports

Other benefits of international trade

-Consumers enjoy increased variety of goods -Producers sell to a larger market, may achieve lower costs by producing on a larger scale -Competition from abroad may reduce market power of domestic firms, which would increase total welfare -Trade enhances the flow of ideas, facilitates the spread of technology around the world

Tariff and import quota similarities

-Raises price, reduces quantity on imports -Reduces buyer's welfare -Increases seller's welfare Creates revenue for the gov.t

If Pd>Pw

-country does not have comparative advantage -under free trade, country imports the good

World Trade Organization(WTO)

est. 1995 enforces trade agreements, resolves disputes

Trade argreements

A country can liberalize trade with -unilateral reductions in trade restricitons -multilateral agreements with other nations e.g. NAFTA 1993 and GATT ongoing

Summary 1

A country will export a good if the world price of the goodi s higher than the domestic price without trade. Trade raises producer surplus, reduces consumer surplus, and raises total surplus

Summary 2

A country will import good if the world price is lower than the domestic price without trade. Trade lowers producer surplus but raises consumer and total surplus

The infant-industry argument

A new industry argues for temporary protection until it is mature and can compete with foreign firms

Summary 3`

A tariff benefits producers and generates revenue for the govt, but the loses to consumers exceed these gains

Import quota

a quantitative limit on imports of a good

Summary 4

Common arguments for restricting trade include: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions.

The infant-industry argument economist response

Difficult for govt to determine which industries will eventuall be able to compete and whether benefits of establishing these industries exceed cost to consumers of restricting imports. Besides, if a firm will be profitable in the long run, it should be willing to incur temporary losses

The protection-as-bargaining-chip argument

Example: The U.S. can threater to limit imports of French win unless France lifts their quotas on American beef

The national security argument economist response

Fine, if trade restrictions based on true security needs. But producers may exaggerate their own importance to national security to obtain protection from foreign competition

If Pd<Pw

-country has comparative advantage in the good -under free trade, country exports the good

Arguments for Restricting Trade

1. The jobs argument 2. The national security argument 3. The infant industry argument 4. The unfair-competition argument 5. The protection-as-bargaining-chip argument

The national security argument

An industry vital to national security should be protected from foreign competition, to prevent dependence on imports that could be disrupted during wartime e.g. oil

Import quota

Creates profits for the foreign producers of the imported goods, who can sell them at a higher price

Tariff difference

Creates revenue for the governemen

The unfair-competition argument

Producers argue their competitors in another country have an unfair advantage, e.g. due to govt subsidies

Summary 5

Some of these arguments have merit in some cases, but economists believe free trade is usually the better policy

The protection-as-bargaining-chip argument economist response

Suppose France refuses. Then the U.S. must choose between two bad options: A) Restric imports from France, which reduces welfare in the U.S. B) Don't restrict imports, which reduces U.S. credibility

The jobs argument economist response

Total unemployment does not rise as imports rise, because job losses from imports are offset by job gains in export industries...

One of Ten Principles

Trade can make everyone better off

The Jobs argument

Trade destroys jobs in industries that compete with imports

The unfair-competition argument economist response

We should welcome impors of low-cost products subsidized by the other country's taxpayers. The gains to our consumers will exceed the losses to our producers

Pw is the only relevant price

when a small economy engages in free trade

comparative advantage

when it produces a good at a lower opportunity cost than other countries