Trade07 - International Trade We've already seen that...

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1 International Trade We’ve already seen that countries are better off (expanded consumption possibilities) if they follow the Law of Comparative Advantage.
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2 In this chapter, look for the answers to these questions: 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
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3 S D Q P Q D P D D D Steel Industry Suppose US has Comparative Disadvantage at the production of steel. Then World Price (P W ) is less than domestic price (P D )
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4 S D Q P Q D P D D D Steel Industry Suppose US has Comparative Disadvantage at the production of steel. Then World Price (P W ) is less than domestic price (P D ) P W
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5 S D Q P Q S Q D P D D D Steel Industry P W
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6 S D Q P Q S Q D P D D D P W Q D - Q S = Imports of steel imports
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7 Who Gains/Who Loses? To determine the welfare effects of “opening” the economy to trade in steel, we consider the effects on Consumer and Producer Surplus
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8 S D Q P Q S Q D P D D D P W Closed Economy imports A B C F D E
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9 S D Q P Q S Q D P D D D P W Open Economy imports A B C F D E
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10 When an economy opens to trade in a good for which it has a comparative disadvantage, the price will fall to the world price: Consumers benefit by consuming more at the lower price Producers (and workers) are harmed because they sell less at a lower price NET GAIN FOR SOCIETY
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11 US has Comparative Advantage If the US is a closed economy, then domestic price is lower than world price (reflecting lower costs of production).
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12 S D Q P Q D Q S P D D D P W Q S - Q D = Exports of steel exports
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13 S D Q P Q D Q S P D D D P W Q S - Q D = Exports of steel exports A B C D E F
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14 S D Q P Q D Q S P D D D P W Q S - Q D = Exports of steel exports A B C D E F
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15 When an economy opens to trade in a good for which it has a comparative advantage, the price will rise to the world price: Consumers are harmed because they consume less at the higher price Producers (and workers) benefit because they sell more at the higher price NET GAIN FOR SOCIETY
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total surplus producer surplus consumer surplus direction of trade rises falls rises imports P D > P W rises rises falls exports P D < P W Summary: The Welfare Effects of Trade Whether a good is imported or exported, trade creates winners and losers. But the gains exceed the losses.
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Trade07 - International Trade We've already seen that...

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