International Trade,The Basic Theory Using Demand and Supply,Objective,1. Why do countries trade? What determines which products a country exports and which products it imports?2. How does trade affect production and consumption in each country?3. How does trade affect the economic well-being of each country? In what sense can we say that a country gains or loses from trade?4. How does trade affect the distribution of economic well-being or income among various groups within the country?,Structure of Lecture,Review about the Economics of Demand and SupplyEffects with No Trade vs. Effects with Free TradeEarly Answers to the Four Trade Questions,I. Review about the Economics of Demand and Supply,1.1 Demand 1.2 Consumer Surplus 1.3 Supply 1.4 Producer Surplus,1.1 Demand,Determinations of consumer demands Preferences, Price of the product, IncomeThe demand curve slope downward. The responsiveness of quantity demanded to a change in price depends on the slope of the demand curvethat is, the price elasticity of demand,1.2 Consumer Surplus,Consumer Surplus: the increase in the economic well-being of consumers who are able to buy the product at a market price lower than the highest price that they are willing and able to pay for the product.消费者剩余：用比消费者为某商品愿意并且能够支付的最高价格更低的市场价格来购买该商品所获得的经济福利。It measures the amount a consumer gains from a purchase by the difference between the price he actually pays and the price he would have been willing to pay.It can be derived from the market demand curve.Graphically, it is equal to the area under the demand curve and above the price.,1.2 Consumer Surplus,1.3 Supply,The determinations of supply: Price of the products, Costs (of producing and selling)The supply curve slopes upwardThe responsiveness of quantity supplied to a change in market price depends on the slope of the supply curvethat is, the price elasticity of supply,1.4 Producer Surplus,Product surplusthe increase in the economic well-being of producers who are able to sell the product at a market price higher than the lowest price that would have drawn out their supply.生产者剩余就是生产者以比他们愿意接受的最低价格更高的市场价格销售商品所获得的经济福利。It measures the amount a producer gains from a sale by the difference between the price he actually receives and the price at which he would have been willing to sell.It can be derived from the market supply curve.Graphically, it is equal to the area above the supply curve and below the price.,1.3 Producer Surplus,Structure of Lecture,Review about the Economics of Demand and SupplyEffects with No Trade vs. Effects with Free TradeEarly Answers to the Four Trade Questions,II. Effects with No Trade vs. Effects with Free Trade,2.1 A National Market with No Trade2.2 Two National Markets and the Opening of Trade2.2.1 Free Trade Equilibrium 2.2.2 Welfare Effects of International Trade,2.1 A National Market with No Trade,If there is no international trade, equilibrium occurs at the price at which the market clearsEquilibrium Price: $2000Equilibrium quantity: 40,000Consumer Surplus: cProducer Surplus: h,2.2 Two National Markets and the Opening of Trade,Arbitrage: buying something in one market and reselling the same thing in another market to profit from a price difference.套利：通过在一个市场上买入某物，在另一个市场上卖出某物而赚取差价的行为。,2.2.1 Free Trade Equilibrium,If there are no transport costs or other frictions, free trade results in the two countries having the same price for the trading products finally, this free-trade equilibrium price can be called the international price or world price.,2.2.1 Free Trade Equilibrium,How to determine the free-trade equilibrium price?Demands for imports Supply of exports Free-trade equilibrium occurs at the price that clears the international market.,2.2.2 Welfare Effects of International Trade,b+d,n,2.2.2 Welfare Effects of International Trade,Effects in the Importing Country (The U.S.A) Effects on Consumers and Producers Consumer Surplus:- With no trade: c- With Free Trade: c+a+b+d- Net Effect of Trade: a+b+dProducer Surplus:- With no Trade: a+e- With Free Trade: e- Net Effect of Trade: -a,2.2.2 Welfare Effects of International Trade,Effects in the Importing Country (The U.S.A) Net National Gains-Premise: ONE-DOLLAR, ONE-VOTE METRICThe one-dollar, one-vote metric says that the analyst will value any dollar of gain or loss equally, regardless of who experience it.-Net gains from Trade: a+b+d-a = b+d,2.2.2 Welfare Effects of International Trade,Effects in the Exporting Country (The rest of the World) Effects on Consumers and ProducersConsumer surplus: - (j+k)Producer Surplus: j+k+nNet National Gains: n,Welfare Effect of Free Trade (US),c,a+b+c,a+d,a+d+c,d,a+b+c+d,a+b,-a,b,Welfare Effect of Free Trade (Rest of World),D,S,Rest of World,1000,700,e+f,e,g,e+f+g,f+h+g,e+f+g+h,-f,f+h,h,2.2.2 Welfare Effects of International Trade,Which Country Gains More?International trade is a positive-sum activity. If a nations price ratio changes x percent (as a percentage of the free-trade price) and the price in the rest of the world changes y percent, thenNations gain = x Rest of worlds gains yThe side with the less elastic (steeper) trade curve (import demand curve or export supply curve) gains more.,