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Unformatted text preview: Chapter 9 Application: International Trade WHATS NEW IN THE THIRD EDITION: Some discussion has been added concerning why trade is contentious and why the government imposes tariffs and quotas even though they are not efficient. There are two new In the News boxes: Trade Policy in India and Globalization. A new Case Study on Trade Agreements has also been added along with a discussion of the role of the World Trade Organization. In addition, the In the News box, Life in Isoland, has been updated. LEARNING OBJECTIVES: By the end of this chapter, students should understand: what determines whether a country imports or exports 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-chapter sequence dealing with welfare economics. Chapter 7 introduced welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 8 173 9 APPLICATION: INTERNATIONAL TRADE 174 Chapter 9/Application: International Trade applied the lessons of welfare economics to taxation. Chapter 9 applies the tools of welfare economics from Chapter 7 to the study 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 determine 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. Since there are gains from trade, restrictions on free trade reduce the gains from trade and cause deadweight losses similar to those generated by a tax. KEY POINTS: 1. 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 producing 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....
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- Fall '08