Unformatted text preview: International Trade International Trade
and Barriers to Trade A Controversial Topic A Controversial Topic Free trade is a dirty word to many They agree on little else Economists generally favor trade Domestic unions ThirdWorld activists Environmentalists Why the difference? What’s Good About Trade: What’s Good About Trade: Comparative Advantage Redux Nations improve wellbeing by specializing The paradox of intraindustry trade Produce good and services with the lowest opportunity cost U.S. imports cars U.S. produces cars Why is Specialization Incomplete? Why is Specialization Incomplete? Product differentiation Two more reasons help us see comparative advantage more deeply Japanese cars and U.S. cars are different Perhaps the biggest single reason Trade between big and small nations Diminishing returns to scale Recall: Complete Specialization Recall: Complete Specialization Basic case: linear PPF DVDs Japan US exports drugs for DVDs Constant opportunity costs Trade at intermediate cost Japanese DVDs are cheaper Linear PPF: always cheaper Steeper than USA’s PPF Flatter than Japan’s PPF USA Pharmaceuticals Gains from Specialization Gains from Specialization US produces only drugs DVDs Consumption Possibilities Frontier At horizontal axis CPF Japan’s Costs Shows what US can consume CPF is farther out than PPF PPF US is better off with trade Buys DVDs more cheaply Steeper than U.S. PPF Flatter than Japan’s PPF Pharmaceuticals What if One Nation is Bigger? What if One Nation is Bigger?
Laptops U.S. and Czech Republic U.S. unsatisfied Trade laptops and beer U.S. economy much larger CR gets all the laptops it wants U.S. wants still more beer Stays on its own PPF Big country sets costs USA U.S. must make some beer Czech Republic Beer What if PPF Nonlinear? What if PPF Nonlinear? Recall: costs usually increase U.S. PPF flat PPF concave Textiles China’s PPF steep Specialize in laptops? Specialize in textiles? China USA As U.S. produces more laptops China’s PPF flattens Its PPF becomes steeper The opportunity cost of laptops rises Opportunity cost of textiles rises Laptops Concave PPFs and Concave PPFs and Specialization If US PPF stays steeper Textiles What if slopes equalize? Still specialize in laptops China sticks with textiles Opp’ty costs equalize Chinese textiles not cheaper Doesn’t pay to import China USA Specialization incomplete Laptops Measuring Gains from Trade: Measuring Gains from Trade: Consumer & Producer Surplus PPFs look at whole economy Now look at a single market: ice cream If there is no trade P S
d US producers make Qd US consumers buy Qd US consumers pay Pd D
d Q The Impact of Trade The Impact of Trade If other countries are more efficient P S At Pw World price is lower US consumes Qd2 US produces Q
d 2 d 1 Pd US imports Q Q d 1 D
Qd1 Qd Qd2 Pw Q Is Trade Good for the U.S.? Is Trade Good for the U.S.? Consumers gain Producers lose Buy more at lower price Sell less at lower price Need a way to compare gain and loss Supply, Demand, & Wellbeing Supply, Demand, & Wellbeing
Do people really want what they pay for? Sarah loves Econ books She is willing to pay $25 for a book Market price is only $10 She gets $15.00 of net happiness! Why $15? Consumer Surplus Consumer Surplus Sarah gets $25 worth of happiness She is willing to pay $25 P D Q Consumer Surplus Consumer Surplus Pe is $10 Sarah gives up $10 of happiness That leaves $15 of net happiness Sarah’s consumer surplus is $15 P
$25 D $10 Q Consumer Surplus Consumer Surplus Consider other consumers All have to pay $1.50 What does Amy do? What does Monica do? Monica is the marginal consumer Zach gets $20 of happiness Colin gets $15 Monica gets $10 Amy gets $1.25 P D Monica Amy She gets no surplus Indifferent about buying a book Q Total Consumer Surplus Total Consumer Surplus P For the whole market Can express as integral There are many vertical lines In the limit: form a triangle
Pe D Q Impact of Price Hike Impact of Price Hike P What happens if Pe of books rises by $5? Higher price shrinks triangle $15 $10 Total loss is trapezoid Consumers buy less Consumers pay more D Q Producer Surplus Producer Surplus Analogous to consumer surplus Pubisher is willing to sell 1st book for $1 Cost of producing 1 more book rises Gets $9 surplus Publisher’s producer surplus falls Total Producer Surplus Total Producer Surplus Analogous to total consumer surplus In limit vertical lines form a triangle Bounded above by price P S Pe Q Gains from Exchange Gains from Exchange Overall benefit to society P S Sum of surpluses What is the impact of a Consumers & Producers Price ceiling? Price floor? D Q Trade and Consumer and Trade and Consumer and Producer Surplus In the absence of trade Overall gain from exchange: sum of triangles Consumer Surplus: Yellow Producer Surplus: Blue
d P S D Q d Q Trade Increases Trade Increases Consumer & Producer Surplus If Pw < Pd CS rises (Yellow) PS falls (Blue) Are we better off? Total gain is larger P S Was red triangle Now sum of yellow & blue Consumers gain more than producers lose Pw D Q Arguments for Restraining Trade Arguments for Restraining Trade Infant Industry Pro: Just need a temporary hand Con: Will the infant ever grow? HarleyDavidson reorganized in 1980s Steel industry in 1970s, 80s, 90s, 00s National Security Added danger: what goes around comes around Pro: Must assure uninterrupted access Con: Don’t have to protect everyone Unfair Trade Practices Unfair Trade Practices Dumping Undercuts native firms A form of “predatory pricing” Charge lower price in foreign market than domestically Sometimes subsidized by foreign governments Domestic firms driven out of market Foreign firms can recoup losses by raising prices Is Dumping Overrated? Is Dumping Overrated? Dumping is hard to define Is dumping really profitable? Must every price be lower in France? Can foreign firms really recoup losses? Should U.S. worry if French pay higher taxes and we eat cheap brie? Who is hurt? The Impact of Tariffs The Impact of Tariffs A tax on imports P S Pw’ D Q Pw US consumers buy less US firms produce more Imports fall Are we better off? Raises world price US price rises to Pw’ The Impact of Tariffs The Impact of Tariffs Consumer Surplus falls Producer Surplus rises Wellbeing falls P S Pw’ D Q Pw Trapezoid overstates loss Loss = white Better than w/o trade Recall: A Tariff Is a Tax Recall: A Tariff Is a Tax Red rectangle not a loss P S Pw’ D Q Pw Others in U.S. gain from tax It is tax revenue Tax rate*Quantity of Imports Revenue goes to others A transfer from importers Loss = white triangles On right: Lost consumption On left: Overproduction Quotas Restrict Imports Quotas Restrict Imports A direct limit on quantity P S Pw’ D
Qd1 Qd2 Imports were Qd2Qd1 Raises U.S. price Quota given by red line Let effect be same as for tariff U.S. price again rises to Pw’ U.S. consumers buy less U.S. firms produce more Pw Q Impact looks the same Quotas and Wellbeing Quotas and Wellbeing Consumer Surplus falls Producer Surplus rises Wellbeing falls P S Pw’ D Q Pw Now no offsetting taxes Still better than no trade (red) CS falls more than PS rises Loss = trapezoid Loss is whole white trapezoid Why Do We Restrict Trade? Why Do We Restrict Trade? Pain of trade is vivid Benefits of restrictions concentrated Easy to see farm or plant close A few have a lot to gain Cost of restrictions is invisible Sugar beet growers exert disproportionate pressure Pain of restrictions diffused What would consumers have spent money on? Many consumers pay a little more Is Nothing Wrong with Trade? Is Nothing Wrong with Trade? Resources do not move smoothly to best use Trade Adjustment Assistance Total gains outweigh total losses in theory Losers are not generally compensated in practice Attempt to have winners subsidize losers Has not worked well Workers no more employable Extended unemployment spells Can Free Trade Restrict Trade? Can Free Trade Restrict Trade? Yes – if limited to trade bloc Trade is free within bloc Barriers remain (sometimes raised) for others Can divert trade from most efficient producers European Union NAFTA ...
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