Chapter 9

Quota

A numerical limit imposed by the government on the quantity of a good that can imported

Effects of Quotas

A quota restricts imports and raises the price in that country, but it also increases producer surplus. Without quotas a country would import almost all of its goods

Tariff

A tax imposed by a government on imports

World Trade Organization

An international organization that oversees international trade agreements

Opposition to the WTo

Anti-globalization forces Old Fashioned Protectionists Perceived WTO first world bias

Positive Analysis

Based on what actually is

Normative Analysis

Based on what should be

How can we decide whether allowing free trade makes Americans better off overall?

By comparing economic surplus from the market with no trade and with trade

Where does comparative advantage come from

Climate and natural resources Relative abundance of labor and capital Technological differences External economies

Surplus without Trade

Consumer is blue, red is producer

Surplus Graph with trade

Consumers gain C and D, and producers lose B. In this case, overall economic surplus rises compared to no trade

Special Interest Groups effect on trade

Domestic industries have an interest in restricting trade that would hurt them

Imports

Goods and services bought domestically but produced in other countries

Anti-globalization forces

Lesser developed countries have less strict regulations, creating perception of unfairness

Quotas and Voluntary Export Restraints

Limits imposed (quotas) or negotiated between (VERs) countries on the quantity of a good imported by one country from another

Should countries keep tariffs?

Many people argue that removing restrictions would only be useful if other countries would do the same. But many people also argue that the US would benefit even if it dropped its restrictions alone.

Other barriers to trade

National security Higher Standard on imported goods

Is trade always good?

No, firms that face international competition lose out under free trade. These firms deserve sympathy especially when their workers start to lose jobs

Is deciding whether free trade good or not normative or positive

Normative

Effects of a Tariff on Economic Surplus

Overall Economic Surplus Falls. Loss of Consumer Surplus = A+C+T+D, Increase in Consumer Surplus = A, Government Tariff Revenue = T, Deadweight Loss = C+D

Effects of Trade Restrictions

Overall, they cause a fall in economic surplus, but they tend to help save domestic jobs and keep the domestic economy stable

External economies

Reductions in a firm's costs may result in an increase in the local size of that industry

Old fashioned protectionists

Restricting trade "saves jobs" and "protects high wages"

Societal Cost of Maintaining Import Restrictions

Saves domestic jobs This is very expensive for the domestic consumers.

Dumping

Selling a product for below its cost of production in order to gain unfair market share

Climate and natural resources

Some nations are better suited for producing certain goods. Especially important in agriculture

Relative abundance of labor and capital

Some nations have more or less skilled workers, and relatively better or worse infrastructure

Perceived WTO first world bias

Some people think the WTO favors high-income countries

Ways to restrict trade:

Tariffs Quotas and Voluntary Export Restraints

Tariffs

Taxes imposed by a government on goods imported into a country

Terms of trade

The ratio at which a country can trade its exports for imports from other countries

Free trade

Trade between countries that is without government restrictions

When will a country import goods?

When the good can be purchased for a lower price (opportunity cost) than it can be domestically produced

Is their harm in trade?

Yes, individual firms suffer when countries specialize. These firms are unable to compete with the prices offered when trading

Does comparative advantage shift over time?

Yes, the conditions that determine comparative advantage are constantly changing

Autarky

a situation in which two nations don't trade, so the prices in each nation match the opportunity cost of producing those goods