Chapter%209.A - CHAPTER 9 CHAPTER INTERNATIONAL TRADE...

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CHAPTER 9 CHAPTER 9 INTERNATIONAL TRADE INTERNATIONAL TRADE
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Main issues What determines how much of a good a country will import or export? Who benefits from trade? Who does trade harm? Do the gains outweigh the losses? If policymakers restrict imports, who benefits? Who is harmed? Do the gains of the policy outweigh the losses? What are some common arguments for restricting trade? Do they have merit?
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Recall:   A country has a comparative advantage in a good if it produces the good at lower opportunity cost than other countries. Countries can gain from trade if each exports the goods in which it has a comparative advantage. Now we apply the tools of welfare economics to see where these gains come from and who gets them.
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P W = the world price of a good, the price that prevails in world markets P D = domestic price without trade If P D < P W , country has comparative advantage in the good under free trade, country exports the good If P D > P W , country does not have comparative advantage under free trade, country imports the good
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The Small Economy Assumption A small economy is a price taker in world markets: Its actions have no affect on P W . Not always true – especially for the U.S. – but simplifies the analysis without changing its lessons. When a small economy engages in free trade, P W is the only relevant price: 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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A Country That Exports Soybeans Without trade, P D = $4 Q = 500 P W = $6 Under free trade, domestic consumers demand 300 domestic producers supply 750 exports = 450 P Q D S $6 $4 500 300 Soybeans exports 750
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A Country That Exports Soybeans Without trade, CS = A + B PS = C Total surplus = A + B + C With trade, CS = A PS = B + C + D Total surplus = A + B + C + D P Q D S $6 $4 Soybeans exports A B D C Net gain from trade
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This note was uploaded on 01/27/2011 for the course ECON 1000 taught by Professor Ayhoo during the Spring '10 term at California Coast University.

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Chapter%209.A - CHAPTER 9 CHAPTER INTERNATIONAL TRADE...

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