9,Application: International Trade,What determines whether a country imports or exports a good?,Who gains and who loses from free trade among countries?,What are the arguments that people use to advocate trade restrictions?,THE DETERMINANTS OF TRADE,Equilibrium Without Trade Assume: A country is isolated from rest of the world and produces steel. The market for steel consists of the buyers and sellers in the country. No one in the country is allowed to import or export steel.,Figure 1The Equilibrium without International Trade,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,The Equilibrium Without International Trade,Equilibrium Without Trade Results: Domestic price adjusts to balance demand and supply. The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive.,The World Price and Comparative Advantage,If the country decides to engage in international trade, will it be an importer or exporter of steel?,The World Price and Comparative Advantage,The effects of free trade can be shown by comparing the domestic price of a good without trade and the world price of the good. The world price refers to the price that prevails in the world market for that good.,The World Price and Comparative Advantage,If a country has a comparative advantage, then the domestic price will be below the world price, and the country will be an exporter of the good.,The World Price and Comparative Advantage,If the country does not have a comparative advantage, then the domestic price will be higher than the world price, and the country will be an importer of the good.,Figure 2 International Trade in an Exporting Country,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Figure 3 How Free Trade Affects Welfare in an Exporting Country,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Figure 3 How Free Trade Affects Welfare in an Exporting Country,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,How Free Trade Affects Welfare in an Exporting Country,THE WINNERS AND LOSERS FROM TRADE,The analysis of an exporting country yields two conclusions: Domestic producers of the good are better off, and domestic consumers of the good are worse off. Trade raises the economic well-being of the nation as a whole.,The Gains and Losses of an Importing Country,International Trade in an Importing Country If the world price of steel is lower than the domestic price, the country will be an importer of steel when trade is permitted. Domestic consumers will want to buy steel at the lower world price. Domestic producers of steel will have to lower their output because the domestic price moves to the world price.,Figure 4 International Trade in an Importing Country,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Figure 5 How Free Trade Affects Welfare in an Importing Country,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Figure 5 How Free Trade Affects Welfare in an Importing Country,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Figure 5 How Free Trade Affects Welfare in an Importing Country,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,How Free Trade Affects Welfare in an Importing Country,THE WINNERS AND LOSERS FROM TRADE,How Free Trade Affects Welfare in an Importing Country The analysis of an importing country yields two conclusions: Domestic producers of the good are worse off, and domestic consumers of the good are better off. Trade raises the economic well-being of the nation as a whole because the gains of consumers exceed the losses of producers.,THE WINNERS AND LOSERS FROM TRADE,The gains of the winners exceed the losses of the losers. The net change in total surplus is positive.,The Effects of a Tariff,A tariff is a tax on goods produced abroad and sold domestically. Tariffs raise the price of imported goods above the world price by the amount of the tariff.,Figure 6 The Effects of a Tariff,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Tariff,Figure 6 The Effects of a Tariff,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Figure 6 The Effects of a Tariff,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Tariff,Figure 6 The Effects of a Tariff,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Tariff,Figure 6 The Effects of a Tariff,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Tariff,World,price,Figure 6 The Effects of a Tariff,Copyright 2004 South-Western,Price,of Steel,0,Quantity,of Steel,Tariff,World,price,The Effects of a Tariff,The Effects of a Tariff,A tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade. With a tariff, total surplus in the market decreases by an amount referred to as a deadweight loss.,