Chapter 9

When a certain nation abandoned a policy of prohibiting international trade in automobiles in favor of a free-tree policy, the result was that the country began to import automobiles. The change in policy improved the well-being of that nation in the sense that

the gains to automobile consumers in that nation exceeded the losses of the automobile producers in that nation.

Spain allows trade with the rest of the world. We know that Spain has a comparative advantage in producing olive oil if we know that

the world price of olive oil is higher than the price of olive oil that would prevail in Spain if trade with other countries were not allowed.

The following diagram shows the domestic demand and supply in a market. Assume that the world price in this market is $10 per unit.

$2,000.

Total surplus in this market before trade is

A + B + C

With the tariff, the domestic price and domestic quantity demanded are

P2 and Q3

With the tariff, the quantity of saddles imported is

Q3 - Q2

If Freedonia changes its laws to allow international trade in software and the world price is higher than its domestic price, then it must be the case that

consumer surplus decreases and producer surplus increases.

When a country abandons a no-trade policy, adopts a free-trade policy, and becomes an exporter of a particular good,

consumer surplus decreases and total surplus increases in the market for that good.

A tariff on a product makes

domestic sellers better off and domestic buyers worse off.

A tax on an imported good is called a

tariff.