chapter 9 - ECON2106 BCKIM Application: International Trade...

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ECON 2106 B-C KIM
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Application: International Trade What determines whether a country imports or exports a good? Who gains and who loses from free trade among countries? What are the arguments that people use to advocate trade restrictions?
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THE DETERMINANTS OF TRADE The effects of free trade can be shown by comparing the price of a good without trade and the price of the good. If a country has a comparative advantage, then the domestic price will be below the world price, and the country will be an of the good. Otherwise, the domestic price will be higher than the world price, and the country will be an .
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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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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 Consumer surplus after trade B Producer surplus after trade
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How Free Trade Affects Welfare in an Exporting Country
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THE WINNERS AND LOSERS FROM TRADE The analysis of an exporting country yields two conclusions: Domestic of the good are better off, and domestic of the good are worse off. Trade raises the economic well-being of the nation as a whole.
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The Gains and Losses of an Importing Country What about an Importing Country? If the world price of steel is lower than the domestic price, the country will be an importer of steel when trade is permitted. domestic consumers will want to buy steel at the lower world price. domestic producers of steel will have to lower their output because the domestic price moves to the world price.
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Figure 3 International Trade in an Importing Country Price of Steel 0 Quantity Price after trade World price of Steel Domestic supply Domestic demand Imports Domestic quantity supplied Domestic quantity demanded Price before trade
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chapter 9 - ECON2106 BCKIM Application: International Trade...

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