Week 12 Lecture - ECON1001 Week 12 International Trade...

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ECON1001 Week 12 International Trade
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2 International Trade: Topic Outline What determines trade patterns? Who benefits from trade? What are the costs of restrictions on international trade? What arguments are there for trade restrictions?
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3 Comparative Advantage Patterns of trade are determined by comparative advantage Countries with the lowest opportunity cost of producing a good Have a “comparative advantage” in the good Specialise in the production of the good Export the good
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4 Equilibrium Without Trade Consider an economy without trade Domestic prices are determined by the forces of demand and supply Demand, supply, and market price determine producer and consumer surplus Consider the market for cars
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5 Equilibrium Without Trade Price of cars 0 Quantity of cars Equilibrium quantity Domestic supply Domestic demand Producer surplus Consumer surplus Equilibrium price
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6 Trade Introduce the possibility of trade Comparative advantage determines whether we import or export cars The world price is the price prevailing in world markets Determined by the interaction between global demand and supply
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7 Trade Suppose we have a comparative advantage in car production ie we have a lower opportunity cost of producing cars Then the world price of cars is greater than the domestic price of cars Domestic producers gain a better price by selling on the world market, so… … we export cars
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8 Trade The world price > domestic price, so Domestic suppliers will switch some supply to the world market… …until the domestic price increases to the world price [Note that this assumes we are too small to affect the world price] Exports equal the difference between the domestic quantity supplied and the domestic quantity demanded at the world price
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9 International Trade and the Exporting Country Price of cars Price before trade Price after trade 0 Quantity of cars Domestic quantity demanded Domestic quantity supplied Domestic supply Total Demand Domestic demand Exports
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Free Trade and Welfare When domestic prices rise to equal the world price, the following occur: Sellers in the exporting country are better off. Buyers in the exporting country are worse off Trade raises the economic well-being of the country as a whole. Producer surplus rises by more than
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Week 12 Lecture - ECON1001 Week 12 International Trade...

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