Chapter 9 - Application International Trade 1 The Determinants of Trade The equilibrium without trade Only domestic buyers and sellers Equilibrium price

Chapter 9 - Application International Trade 1 The...

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Application: International Trade 1
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The Determinants of Trade The equilibrium without trade Only domestic buyers and sellers Equilibrium price and quantity Determined on the domestic market Total benefits Consumer surplus Producer surplus 2
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Figure 1 3 The Equilibrium without International Trade Price of textiles When an economy cannot trade in world markets, the price adjusts to balance domestic supply and demand. This figure shows consumer and producer surplus in an equilibrium without international trade for the textile market in the imaginary country of Isoland. 0 Quantity of textiles Equilibrium quantity Consumer surplus Producer surplus Domestic Demand Equilibrium price Domestic Supply
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The Determinants of Trade Allow for international trade? Price and quantity sold in the domestic market? Who will gain from free trade; who will lose, and will the gains exceed the losses? Should a tariff be part of the new trade policy? 4
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The Determinants of Trade World price Price of a good that prevails in the world market for that good Domestic price Opportunity cost of the good on the domestic market 5
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The Determinants of Trade Compare domestic price with world price Determine who has comparative advantage If domestic price < world price Export the good The country has comparative advantage If domestic price > world price Import the good The world has comparative advantage 6
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Winners and Losers From Trade Exporting country Domestic equilibrium price before trade is below the world price Once trade is allowed Domestic price rises to = world price Domestic quantity supplied > domestic quantity demanded The difference = exports 7
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Figure 2 8 International Trade in an Exporting Country Price of textiles Quantity of textiles 0 Once trade is allowed, the domestic price rises to equal the world price. The supply curve shows the quantity of textiles produced domestically, and the demand curve shows the quantity consumed domestically. Exports from Isoland equal the difference between the domestic quantity supplied and the domestic quantity demanded at the world price. Sellers are better off
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