L17 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel Lecture 18: International trade: the effects of trade on domestic markets Effects on domestic output markets Effects on domestic input markets Trade protection Trade liberalization
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2 Recap: Trade and PPF computers (in millions) wheat (mio pds) 40 80 120 160 200 240 2 4 6 8 10 computers (in millions) wheat (mio pds) 40 80 120 160 200 240 2 4 6 8 10 PPF for US PPF for Japan autarky consumption (wheat more expensive in the world) When trade is opened, countries change their production to specialize in the good that is more expensive in the world market. autarky consumption (computers more expensive in the world) production point with trade production point with trade
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3 Definition Definition Definition Definition Definition Definition Definition The domestic output market with exports domestic demand domestic supply p world price q D domestic exports p q q Export = q S domestic - q D domestic p W > p (domestic price before trade): the economy exports the good p W q S domestic
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4 Exports and the change in surplus domestic demand domestic supply p world price p q Remember: as long as there’s no government, total surplus= CS+PS. p W TS CS’ PS’ TS is the gain from trade q D domestic q S domestic TS
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5 Definition Definition Definition Definition Definition Definition Definition The domestic market with imports domestic demand domestic supply p world price imports p q q Import = q D domestic - q S domestic p W p W < p (domestic price before trade): the economy imports the good q S domestic q D domestic
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6 CS’ Imports and the change in surplus domestic demand domestic supply p world price p q Remember: as long as there’s no government, total surplus= CS+PS. p W TS PS’ TS is the gain from trade q S domestic q D domestic TS
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7 Trade and total surplus: first  summary Trade always increases total surplus It will in general not increase the surplus of everyone in the economy If an economy exports a good (p domestic < p w ), domestic producers of the good gain, domestic consumers of the good lose If an economy imports a good (p domestic > p w ), domestic producers of the good lose, domestic consumers of the good gain In theory, the winners could compensate the losers as there is a net gain from trade!
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8 Trade and the factors of production (1) Domestic prices of corn have risen, domestic prices of wheat decreased more corn and less wheat is produced corn 20 85 30 40 100 60 10 95 wheat A Autarky consumption Consumption after trade
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9 Trade and the factors of production (2) Domestic prices of corn
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