Chapter 9 - Application- international trade

Chapter 9 - Application- international trade - Chapter 9...

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Chapter Application: International Trade 9
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The Determinants of Trade The equilibrium without trade 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 The equilibrium without international trade 1 3 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 Domestic Supply Consumer surplus Producer surplus Domestic Demand Equilibrium price
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The Determinants of Trade Allow for international trade?  Price and quantity sold – 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 The world price and comparative  advantage World price Price of a good that prevails in the world  market for that good Domestic price Opportunity cost of the good 5
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The Determinants of Trade The world price and comparative  advantage Compare domestic price with world price Determine who has comparative  advantage If domestic price < world price Export the good Country – has comparative advantage If domestic price > world price Import the good World – comparative advantage  6
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The Winners and Losers From Trade The gains and losses of an exporting  country If domestic equilibrium price before trade Below 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 International trade in an exporting country 2 8 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 (producer surplus rises from C to B + C + D), and buyers are worse off (consumer surplus falls from A + B to A). Total surplus rises by an
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