International Trade

International Trade - It is relatively easy to incorporate...

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Unformatted text preview: It is relatively easy to incorporate international trade issues into the basic supply and demand analysis. The world demand and supply of a commodity is the sum of domestic and foreign supply and demand. VII. International Trade It is relatively easy Suppose we were looking at the the basic supply Example: to incorporate international trade issues into demand and and demand analysis. The world demand and supply of a commodity is the sum of supply for rice in supply and demand. domestic and foreign Korea. Producers of rice in Korea can sell all of the rice they want at the going world price and Example: Suppose we were looking at the demand and supply market price. consumers can buy all they want at the world for rice in Korea. The world market price (P*) and output (Q*) are The world market world and output and supply. determined byprice (P*)demand (Q*) are determined by world demand and supply. Producers of rice in Korea can sell all of the rice they want at the going world price and consumers can buy all they want at the world market price. In Korea, the domestic supply of rice is given by Sd and the domestic demand for rice is given by Dd. Since Korean producers can either buy or sell at the price of P*, then P* is also the equilibrium price in Korea. At this price, Korean producers are willing to produce Qs rice and consumers want to buy Qd. The difference, Qd Qs, is imports. That is, in this case Korea would be a net importer of rice. Application 1: Suppose that there is a harvest failure of rice in India, so that world supplies of rice fall. What happens in Korea? equilibrium quantity of rice falls to Qw** and price rises to P**. World supplies of rice fall to S2. The new world equilibrium quantity of rice falls World supplies of rice fall to S2. The new world to Qw** and price rises to P**. Application 2. Depending upon the world price of rice d domestic supply and demand conditions, Korea could this new higher price, the of rice. At in produced in ther be AAtthis new higheror net exporterof rice produced a worldincreases, the a tnet importer price, the quantity quantity of riceKorea uantity Korea increases, the falls and imports fall. demanded falls and ice of P*,qKoreaof ricenet importer. At aof rice price of P**, is a demanded quantity world imports fall. orea is a net exporter. Application 2. Depending upon the world price of rice and domestic supply and demand conditions, Korea could either be a net importer or net exporter of rice. At a world price of P*, Korea is a net importer. At a world price of P**, Korea is a net exporter. Application 3: Suppose that the government of Korea imposed a tariff of T dollars per ton of rice. How would that affect domestic production and consumption? Application 3: Suppose that the government of Korea imposed a tariff of T dollars Answer: In this case, the price at which the Korean per ton of rice. How would that affect domestic production and consumption? consumer can buy rice is the world market price plus the tariff. At the this case, price of P*,which the consumers were buy rice is the Answer: In original the price at Korean Korean consumer can willing to buy Qd1 tons of the tariff. At the original price of P*, Korean consumers world market price plus rice and producers were willing to supply willing to buy Qd1 tons of (M1)and producers - Qs1.willing to supply Qs tons were Qs tons of rice.. Imports rice equaled Qd1 were The effect of the tariff is to ) equaled Qd1 - tos1. The effect of the tariff is to raise the of rice.. Imports (M1 raise the price Q domestic consumers and ice to domestic the amount of producers to P* +amount of the tariff to P* + T. pr producers by consumers and the tariff by the T. At this new price, Korean consumers are willing to buy Qd2 tons of rice and Atpthis new are willing to supply Qs2 rice. Imports (M2) now equal Qd2 - Qs2. roducers price, Korean consumers are willing to buy Qd2 tons of the effect of the tariff is to raise theto supply price,rice. Thus, rice and producers are willing domestic Qs2 increase domestic Imports (M2) decrease consumption,. and reduce imports. of the production, now equal Qd2 - Qs2 Thus, the effect tariff is to raise the domestic price, increase domestic production, decrease consumption, and reduce imports. Application 4: The demand and supply analysis can also be used to examine exchange rates among currencies. Example: The demand for Euros depends upon the demand for European goods, the desire of foreigners to invest in Europe The demand for Euros depends upon the demand for European goods, the desire of foreigners to invest in Europe ((i.e.,to buy European believe that the price of Euros(i.e., if individuals e.g., if individuals stocks and bonds), and speculation will rise in believe that the price of Euros will rise in price, they will want to hold more price, they will want to hold more Euros). Euros). (e.g., to buy European stocks and bonds), and speculation The supply of Euros depends upon the demand for The supply of Euros depends upon the demand by holders of Eurosby foreign gholders tof desire of Europeans to invest in foreign the desire of oods and he Euros for foreign goods and nations. Europeans to invest in foreign nations. The equilibrium price of Euros is that price at which the quantity of Euros supplied equals the quantity of Euros demanded. © B.L. Boulier, 2011. 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This note was uploaded on 02/17/2011 for the course ECON 101 taught by Professor Fon during the Spring '06 term at GWU.

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