Econ - Chapter 33

What are the effects of quotas?

(a) Decrease consumers' surplus (b) Increase producers' surplus (c) Gain for importers (d) Net loss (region on either side of import gains) Lost CS > gained PS + importer gains

Quota

A legal limit imposed on the amount of a good that may be imported It reduces the supply of a good and raises the price of imported goods for domestic customers

Tariff

A tax on imports. Its primary effect is to raise the price of the imported good for the domestic customer. In the graph, the tariff causes demand to reduce to Q3 goods. 0-Q2 supplied domestically at the tariff price (differential becomes PS). Q2-Q3 supplied via import and government actually collects the tariff.

Explain the economics of offers and counteroffers on homes?

Buyer and seller are trying to maximize their surplus at the expense of the other's.

Consumers' Surplus

Consumers' surplus = Maximum buying price - Price paid "Dollar measure of the benefit gained by being able to purchase a unit of a good for less than one is willing to pay for it."

What are distributional effects of trade?

Consumers' surplus and producers' surplus

Free international trade

Countries specializing in the production of the goods in which they have a comparative advantage and trading them for other goods, without restrictions.

What is the low foreign wages argument?

Domestic producers argue cheap foreign labor makes it harder to compete with cheaper foreign goods. Others say higher domestic wages don't really amount to a greater cost to the company because they correlate to higher worker productivity.

What is the foreign export subsidies argument?

Domestic producers will often complain that foreign countries give subsidies to their exporters, making it harder to compete. Others reply that this actually benefits domestic consumers at the expense of foreign taxpayers.

What are the results of the S-T case?

Each country will gain additional units of at least one good without additional loss of the other. "Each country gains by specializing in producing and trading the good in which it has a comparative advantage." "Each country consumes beyond its PPF"

How do countries know when they have a comparative advantage?

Economic planners do not plot PPFs or calculate opportunity costs. Instead, speculators note price differentials in two goods between two countries and make themselves better off by trading the goods between countries. The increased demand this generates in each country for its more competitive product has the effect of incentivizing specialization.

How might offshoring provide net benefits to a country?

Even though a domestic employee may lose a job to a foreign worker, they will likely land another job making close to their old salary. However, the company will produce its goods cheaper, shifting the supply curve downward/rightward IN COMPETITIVE INDUSTRIES. The overall effect could be net savings for the domestic population at the expense of a slight reduction in wages

How do politics and economics intersect in arguments for and against free trade?

Even though there is an aggregate net benefit to free trade, it doesn't benefit everyone equally. In particular, producers are better off (at the expense of consumers) in restricted trade environments, so they promote protective policies. The crucial question in determining policy is often not "how does this affect us?", but "how does this affect me?"

How are restricted and free trade good and bad for a country?

Free trade: Consumers benefit at the expense of domestic producers Restricted trade: Domestic producers and government benefit, but consumers lose even more so there is a net cost to society

What is the national defense argument?

If another country has a comparative advantage in national defense industries, we should impose tariffs instead of specializing and trading with them. This is because we need to guarantee access through domestic production. Critics say the idea has been abused to justify tariffs on things like pens, candles, papers, and tuna.

Why does international trade take place?

Individuals want to make themselves better off. Different countries are better at producing certain things, and trade those goods for ones they cannot make as easily.

Is the benefit from international trade a net benefit for individuals?

It is a net benefit for individuals, but not every individual person may gain. For example, a domestic producer may not be able to compete on price with a foreign competitor and will go out of business.

How can a country consume beyond its PPF?

It must specialize and trade (go from NS-NT to S-T).

What is the NS-NT case?

NS-NT = "No specialization, no trade" This means neither country is specializing in the production of one of the two goods, nor are the two countries trading with each other. Each country will be at an intermediate point on its PPF.

Compare and contrast outsourcing and offshoring.

Outsourcing entails purchasing a product or process from an outside supplier rather than producing it in-house. Offshoring refers to outsourcing certain work activities to individuals in another country.

Producers' Surplus

Producers' Surplus = Price received - Minimum selling price "Dollar measure of the benefit gained by being able to sell a unit of output for more than one is willing to sell it."

What is the S-T case?

S-T = "specialization-trade" The countries specialize in the production of the good in which they have a comparative advantage and agree to terms of trade.

What is the antidumping argument?

Some fear foreign companies will engage in dumping to drive domestic competition out of business, then jack up prices. Others reply that competition would return as soon as prices were raised, and the foreign company would have nothing but dumping-related losses to show for their efforts. Additionally, we should let domestic consumers benefit from such foolishness.

What is the saving domestic jobs argument?

Some producers argue they might have to scale back operations (read, fire employees) or go out of business when unable to compete with foreign producers. Others argue being outcompeted is proof domestic labor resources are misallocated and could be moved to an industry where the country has a comparative advantage.

What are the two most common ways of restricting international trade?

Tariffs and quotas

What do tariffs do to the supply-demand curve?

Tariffs: (a) Reduce overall demand (b) Reduce imports (while increasing domestic sales) (c) Reduce consumer surplus (d) Increase domestic producer surplus (e) Gain to government (tariff x imported goods) (f) Net loss: The red regions

Comparative Advantage

The ability of a country to produce a good at a lower opportunity cost than another country can.

Comparative Advantage

The advantage a country has when it can produce a good at lower opportunity cost than another country can.

How are the terms of trade set?

The countries will agree on trade terms that make them both better off. Favorable trade terms are found between each country's PPF opportunity cost for 1 good X (or 1 good Y). Trade's lower opportunity costs means each party has relatively more of all goods. For example, if the US has the following opportunity costs: 3F = C And Japan has the following cost: F = C The US will produce F, Japan will produce C, and they will agree on terms of between 1-3 F per C, maybe 2. This enables the US to give up less F for each unit C, and enables Japan to get more F for each unit C.

Why might husband and wife split household tasks instead of completing 50% of each task each?

The husband and wife might have comparative advantages in terms of how quickly they can complete one or another task (i.e., the opportunity cost for mowing one lawn might be cleaning half a house for one partner, etc.) By performing those tasks each is better at, they are both better off by saving time.

Dumping

The sale of goods abroad at a price below their cost and below the price charged in the domestic market.

Specialization

This means production is shifted to produce more of what a country has a comparative advantage in. The country shifts to one extreme of its PPF.

What kinds of arguments are advanced in defense of trade restrictions?

Typically the arguments focus on a supposed public interest. Common arguments include the national defense argument, the infant industry argument, the antidumping argument, the foreign export subsidies argument, the low foreign wages argument, and the saving domestic jobs argument. Opponents fear abuse of any or all of these principles.

What is the infant industry argument?

We need to temporarily protect new industries from older, established, foreign competitors until they mature. Critics say it's almost impossible to remove the protections afterward.

What assumptions will be made when analyzing international trade in this chapter?

We will assume a two-country, two-good world, to simplify PPF analysis.

Can a country (or individual) enter trade without being the absolute "best" at something?

Yes, it just has to find a trade partner it has a COMPARATIVE advantage against in terms of what it does best. That partner may even be capable of producing both goods at a higher output, but they will be relatively better off trading if you have a comparative advantage in producing one of the goods.