ECON STUDYGUIDE. TEST TWO.

ECON STUDYGUIDE. TEST TWO. - 1 Econ Studyguide. Test Two....

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1 Econ Studyguide. Test Two. Chapter 9. World price: The price of a good that prevails in the world market for that good. o If the world price is higher than the domestic price, then country x would become an exporters of steel once trade is permitted. o If the world price is lower than the domestic price, then country x would become an importer of steel. On the graph: o The demand curve sows the quantity demanded by the buyers of country x. o If the domestic quantity supplied is greater than quantity demanded, then country x will export that good to other countries. o If the domestic quantity supplied is less than the quantity demanded, then country x will import that good to other countries. Trade among nations is ultimately based on comparative advantage. o If the domestic price of a good is low, the cost of producing that good is low. This suggests that this country has a comparative advantage in producing this good. o If the domestic price of a good is high, the cost of producing that good is high. This suggests that foreign countries have a comparative advantage in producing steel. Exports: o In this case, world trade forces the domestic price to rise to the world price. o Domestic producers are now better off (they can sell for more), but domestic consumers are worse off (they have to buy at a higher price). o Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers. Imports: o In this case, the domestic price falls to meet the world price. o Domestic consumers are now better off (they can buy lower), but domestic producers are now worse off (they have to sell lower) o Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers. Tariffs: o Tariff: A tax on goods produced abroad and sold domestically. o A tariff raises the price of an imported good above the world price by the amount of the tariff. o The tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade. o Because the tariff raises the price, domestic sellers are better off, domestic buyers are worse off, and the government raises revenue. o To calculate the total welfare effects of the tariff, we add the change in consumer surplus, the change in producer surplus, and the change in government revenue. Total surplus decreases. These areas of decrease are called dead weight loss.
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This note was uploaded on 04/24/2009 for the course ECON 2105h taught by Professor Staff during the Spring '08 term at UGA.

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ECON STUDYGUIDE. TEST TWO. - 1 Econ Studyguide. Test Two....

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