09 International Trade SV

09 International Trade SV - International trade is a...

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International trade is a contentious yet fruitful application of our basic economic tools: What determines whether a country imports or exports a good? Who gains and who loses from free trade among countries? What are the major arguments for free trade, or conversely for trade restrictions?
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Figure 1 The Equilibrium without International Trade Consumer surplus Producer surplus Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Equilibrium price Equilibrium quantity
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The World Price and Comparative Advantage If the country decides to engage in international trade, will it be an importer or exporter of steel? The effects of free trade can be shown by comparing the domestic price of a good without trade and the _________ of the good. The world price refers to the price that prevails in the world market for that good. Small economy assumption : The world price will not change due to the small country’s entry or exit from the world market.
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Once the domestic market is open, the domestic price will converge to the world price, P W. because: • No seller would accept less than P W , because she could sell the good for P W in world markets. • No buyer would pay more than P W , because he could buy the good for P W in world markets.
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What if the world price is higher than the domestic price before trade? Price of Steel 0 Quantity of Steel Domestic supply Price after trade World price Domestic demand ______ Price before trade Domestic quantity demanded Domestic quantity supplied
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The World Price and Comparative Advantage If the domestic price is below the world price, then a country has a comparative advantage in the good (try think in terms of opportunity cost) the country will be an exporter of the good. If the domestic price is higher than the world price, then a country does not have a comparative advantage in the good the country will be an importer of the good.
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Figure 2 International Trade in an Exporting Country D C B A Price of Steel 0 Quantity of Steel Domestic supply Price after trade World price Domestic demand Exports Price before trade
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Figure 2 International Trade in an Exporting Country D C B A Price of Steel 0 Quantity of Steel Domestic supply Price after trade World price Domestic demand Exports Price before trade C B 0
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How Free Trade Affects Welfare in an Exporting Country 0
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The Gains and Losses of an Exporting Country The analysis of an exporting country yields two conclusions about welfare:
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This note was uploaded on 11/28/2010 for the course ECON 200 taught by Professor Newton during the Fall '08 term at Ohio State.

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09 International Trade SV - International trade is a...

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