KW_Macro_Ch_18_Sec_02_Supply_Demand_and_International_Trade

KW_Macro_Ch_18_Sec_02_Supply_Demand_and_International_Trade...

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>> International Trade Section 2: Supply, Demand, and International Trade chapter 18 Simple models of comparative advantage are helpful for understanding the funda- mental causes of international trade. However, to analyze the effects of international trade at a more detailed level and to understand trade policy, it helps to return to the supply and demand model. We’ll start by looking at the effects of imports on domes- tic producers and consumers, then turn to the effect of exports. The Effects of Imports Figure 18-4 shows the U.S. market for roses, ignoring international trade for a moment. It introduces a few new concepts: the domestic demand curve, the domestic supply curve, and the domestic or autarky price. The domestic demand curve shows how the quantity of a good demanded by resi- dents of a country depends on the price of that good. Why “domestic”? Because people living in other countries may demand the good, too. Once we introduce international trade, we need to distinguish between purchases of a good by domestic consumers and The domestic demand curve shows how the quantity of a good demanded by domestic consumers depends on the price of that good.
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2 CHAPTER 18 SECTION 2: SUPPLY, DEMAND, AND INTERNATIONAL TRADE purchases by foreign consumers. So the domestic demand curve reflects only the demand of residents of our own country. Similarly, the domestic supply curve shows how the quantity of a good supplied by producers inside a country depends on the price of that good. Once we introduce international trade, we need to distinguish between the supply of domestic producers and foreign supply—supply brought in from abroad. In autarky, with no international trade in roses, the equilibrium in this market would be determined by the intersection of the domestic demand and domestic sup- ply curves, point A . The equilibrium price of roses would be P A , and the equilibrium The domestic supply curve shows how the quantity of a good supplied by domestic producers depends on the price of that good. Figure 18-4 P r ice of r oses (pe r box) Quantity of r oses (boxes) Consumer surplus Producer surplus Domestic supply A Q A P A Domestic demand Consumer and Producer Surplus in Autarky In the absence of trade, domestic price is P A , the autarky price at which the domestic supply curve and the domestic demand curve inter- sect. The quantity produced and consumed domestically is Q A . Consumer surplus is repre- sented by the blue-shaded area, and producer surplus is represented by the red-shaded area.
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quantity of roses produced and consumed would be Q A . As always, both consumers and producers would gain from the existence of the domestic market. Consumer sur- plus would be equal to the area of the upper shaded triangle in Figure 18-4. Producer surplus would be equal to the area of the lower shaded triangle. And total surplus would be equal to the sum of these two shaded triangles. Now let’s imagine opening up this market to imports. To do this, we must make
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_18_Sec_02_Supply_Demand_and_International_Trade...

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