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1、Chapter 9/Application: International Trade1799APPLICATION: INTERNATIONAL TRADEWHATS NEW IN THE SEVENTH EDITION:A new In the News feature on “Threats to Free Trade” has been added.LEARNING OBJECTIVES:By the end of this chapter, students should understand:what determines whether a country imports or e
2、xports a good.who wins and who loses from international trade.that the gains to winners from international trade exceed the losses to losers.the welfare effects of tariffs and import quotas.the arguments people use to advocate trade restrictions.CONTEXT AND PURPOSE:Chapter 9 is third in a three-chap
3、ter sequence dealing with welfare economics. Chapter 7 introduced welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 8 applied the lessons of welfare economics to taxation. Chapter 9 applies the tools of welfare economics from Chapter 7 to the study
4、of international trade, a topic that was first introduced in Chapter 3.The purpose of Chapter 9 is to use welfare economics to address the gains from trade more precisely than in Chapter 3, which discussed comparative advantage and the gains from trade. This chapter develops the conditions that dete
5、rmine whether a country imports or exports a good and discusses who wins and who loses when a country imports or exports a good. This chapter will show that when free trade is allowed, the gains of the winners exceed the losses of the losers. Because there are gains from trade, restrictions on free
6、trade reduce the gains from trade and cause deadweight losses similar to those generated by a tax.KEY POINTS:The effects of free trade can be determined by comparing the domestic price without trade to the world price. A low domestic price indicates that the country has a comparative advantage in pr
7、oducing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer.When a country allows trade and becomes an exporter of a good, producers of the goo
8、d are better off, and consumers of the good are worse off. When a country allows trade and becomes an importer of a good, consumers are better off, and producers are worse off. In both cases, the gains from trade exceed the losses.A tariffa tax on importsmoves a market closer to the equilibrium that
9、 would exist without trade and, therefore, reduces the gains from trade. Although domestic producers are better off and the government raises revenue, the losses to consumers exceed these gains.There are various arguments for restricting trade: protecting jobs, defending national security, helping i
10、nfant industries, preventing unfair competition, and responding to foreign trade restrictions. Although some of these arguments have merit in some cases, economists believe that free trade is usually the better policy.CHAPTER OUTLINE:This chapter may be difficult to teach and very difficult for stud
11、ents to understand and accept. Be prepared for a skeptical reaction from students who have been told that free international trade is detrimental to a country. For various historical, cultural, and political reasons, free trade has few defenders outside of the economics profession.Point out that int
12、ernational trade issues are no different from trading as it applies to individuals within a community or between states and regions within a country. The gains from trade between countries occur for the same reasons that we observe gains from trade between individuals. Pick a state adjacent to yours
13、. Ask students why we do not seem to worry about “importing” goods from other states the same way in which we worry about importing goods from other countries.I.The Determinants of TradeA.Example used throughout the chapter: The market for textiles in a country called Isoland.B.The Equilibrium witho
14、ut Trade1.If there is no trade, the domestic price in the textile market will balance supply and demand.Figure 12.A new leader is elected who is interested in pursuing trade. A committee of economists is organized to determine the following:a.If the government allows trade, what will happen to the p
15、rice of textiles and the quantity of textiles sold in the domestic market?b.Who will gain from trade, who will lose, and will the gains exceed the losses?c.Should a tariff (a tax on imported textiles) be part of the new trade policy?C.The World Price and Comparative Advantage1.The first issue is to
16、decide whether Isoland should import or export textiles.a.The answer depends on the relative price of textiles in Isoland compared with the price of textiles in other countries.b.Definition of world price: the price of a good that prevails in the world market for that good.2.If the world price is gr
17、eater than the domestic price, Isoland should export textiles; if the world price is lower than the domestic price, Isoland should import textiles.a.Note that the domestic price represents the opportunity cost of producing textiles in Isoland, while the world price represents the opportunity cost of
18、 producing textiles abroad.b.Thus, if the domestic price is low, this implies that the opportunity cost of producing textiles in Isoland is low, suggesting that Isoland has a comparative advantage in the production of textiles. If the domestic price is high, the opposite is true.II.The Winners and L
19、osers from TradeA.We can use welfare analysis to determine who will gain and who will lose if free trade begins in Isoland.B.We will assume that, because Isoland would be such a small part of the market for textiles, they will be price takers in the world economy. This implies that they take the wor
20、ld price as given and must sell (or buy) at that price.C.The Gains and Losses of an Exporting Country1.If the world price is higher than the domestic price, Isoland will export textiles. Once free trade begins, the domestic price will rise to the world price.2.As the price of textiles rises, the dom
21、estic quantity of textiles demanded will fall and the domestic quantity of textiles supplied will rise. Thus, with trade, the domestic quantity demanded will not be equal to the domestic quantity supplied.Have students come to the board and label the areas of consumer and producer surplus after you
22、have drawn each of the figures. This should not be a problem as they are likely familiar enough with consumer and producer surplus after completing Chapters 7 and 8.Figure 23.Welfare without Tradea.Consumer surplus is equal to: A + B.b.Producer surplus is equal to: C.c.Total surplus is equal to: A +
23、 B + C.4.Welfare with Tradea.Consumer surplus is equal to: A.b.Producer Surplus is equal to: B + C + D.c.Total surplus is equal to: A + B + C + D.5.Changes in Welfarea.Consumer surplus changes by: B.b.Producer surplus changes by: +B + D.c.Total surplus changes by: +D.6.When a country exports a good,
24、 domestic producers of the good are better off and domestic consumers of the good are worse off.7.When a country exports a good, total surplus is increased and the economic well-being of the country rises.D.The Gains and Losses of an Importing Country1.If the world price is lower than the domestic p
25、rice, Isoland will import textiles. Once free trade begins, the domestic price will fall to the world price.2.As the price of textiles falls, the domestic quantity of textiles demanded will rise and the domestic quantity of textiles supplied will fall.a.Thus, with trade, the domestic quantity demand
26、ed will not be equal to the domestic quantity supplied.b.Isoland will import the difference between the domestic quantity demanded and the domestic quantity supplied.Note that there will be both imported and domestically produced textiles sold in this country. This is true for many imported goods.Fi
27、gure 33.Welfare without Tradea.Consumer surplus is equal to: A.b.Producer surplus is equal to: B + C.c.Total surplus is equal to: A + B + C.4.Welfare with Tradea.Consumer surplus is equal to: A + B + D.b.Producer surplus is equal to: C.c.Total surplus is equal to: A + B + C + D.5.Changes in Welfarea
28、.Consumer surplus changes by: +B + D.b.Producer surplus changes by: B.c.Total surplus changes by: +D.6.When a country imports a good, domestic consumers of the good are better off and domestic producers of the good are worse off.7.When a country imports a good, total surplus is increased and the eco
29、nomic well-being of the country rises.Be prepared for students to argue that trade cannot be good for everyone. More than likely at least one of your students will know an individual who lost his or her job when a factory closed and moved to another country. Take this opportunity to point out that t
30、his individual is one of the “losers,” but remind the class that the gains from trade exceed the losses, so the total well-being of society is increased.Point out that during the 1990s with open trading (for example, the passage of NAFTA), the U.S. economy achieved and maintained full employment eve
31、n as large quantities of imported goods entered the United States. Most of the jobs that “left the country” were low-skill, low-wage jobs. E.Trade policy is often contentious because the policy creates winners and losers. If the losers have political clout, the result is often trade restrictions suc
32、h as tariffs and quotas.F.The Effects of a Tariff1.Definition of tariff: a tax on goods produced abroad and sold domestically.2.A tariff raises the price above the world price. Thus, the domestic price of textiles will rise to the world price plus the tariff.3.As the price rises, the domestic quanti
33、ty of textiles demanded will fall and the domestic quantity of textiles supplied will rise. The quantity of imports will fall and the market will move closer to the domestic market equilibrium that occurred before trade.4.Welfare before the Tariff (with trade)a.Consumer surplus is equal to: A + B +
34、C + D + E + F.b.Producer surplus is equal to: G.c.Government revenue is equal to: zero.d.Total surplus is equal to: A + B + C + D + E + F + G.Figure 45.Welfare after the Tariffa.Consumer surplus is equal to: A + B.b.Producer surplus is equal to: C + G.c.Government revenue is equal to: E.d.Total surp
35、lus is equal to: A + B + C + E + G.6.Changes in Welfarea.Consumer surplus changes by: C - D - E - F).b.Producer surplus changes by: +C.c.Government revenue changes by: +E.d.Total surplus changes by: D - F.G.FYI: Import Quotas: Another Way to Restrict Trade1.An import quota is a limit on the quantity
36、 of a good that can be produced abroad and sold domestically.2.Import quotas are much like tariffs.a.Both tariffs and quotas raise the domestic price of the good, reduce the welfare of domestic consumers, increase the welfare of domestic producers, and cause deadweight losses.b.However, a tariff rai
37、ses revenue for the government, whereas a quota creates surplus for license holders.c.A quota can potentially cause a larger deadweight loss than a tariff, depending on the mechanism used to allocate the import licenses.H.The Lessons for Trade PolicyThis section provides a good opportunity to review
38、 what the students have learned thus far about trade. You should reinforce the idea that total surplus rises when trade is introduced, but falls once trade restrictions are imposed.1.If trade is allowed, the price of textiles will be driven to the world price. If the domestic price is higher than th
39、e world price, the country will become an importer and the domestic price will fall. If the domestic price is lower than the world price, the country will become an exporter and the domestic price will rise.2.If a country imports a product, domestic producers are made worse off, domestic consumers a
40、re made better off, and the gains of consumers outweigh the losses of producers. If a country exports a product, domestic producers are made better off, domestic consumers are made worse off, and the gains of producers outweigh the losses of consumers.3.A tariff would create a deadweight loss becaus
41、e total surplus would fall.I.In the News: Threats to Free Trade1.In the wake of the recent deep recession, policymakers around the world imposed trade restrictions.2.This article from The Wall Street Journal describes the increase in protectionist policies.J.Other Benefits of International Trade1.In
42、 addition to increasing total surplus, there are several other benefits of free trade.2.These include an increased variety of goods, lower costs through economies of scale, increased competition, and an enhanced flow of ideas.III.The Arguments for Restricting TradeA.The Jobs Argument1.If a country i
43、mports a product, domestic producers of the product will have to lay off workers because they will decrease domestic output when the price declines to the world price.2.Free trade, however, will create job opportunities in other industries where the country enjoys a comparative advantage.B.In the Ne
44、ws: Should the Winners from Free Trade Compensate the Losers?1.In light of the jobs argument, some people argue for taxpayer-subsidized retraining programs to help those who lose their jobs due to free trade.2.This opinion piece from The New York Times focuses on the net gains from trade and argues
45、for no compensation for the losers from trade by drawing parallel examples from daily life.C.The National-Security Argument1.Protecting certain industries may be appropriate if they produce products necessary for national security.2.In many of the cases for which this argument is used, the role of t
46、he particular market in providing national security is exaggerated. D.The Infant-Industry Argument1.New industries need time to establish themselves to be able to compete in world markets.2.Sometimes older industries argue that they need temporary protection to help them adjust to new conditions.3.E
47、ven if this argument is legitimate, it is nearly impossible for the government to choose which industries will be profitable in the future and it is even more difficult to remove trade restrictions in an industry once they are in place.E.The Unfair-Competition Argument1.It is unfair if firms in one country are forced to comply with more regulations than firms in another country, or if another government subsidizes the