08 - International Trade - International Trade PRINCIPLES...

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International Trade PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD
Introduction There is not much that can be said of international trade that is untrue of trade, generally. Refer to chapter 2 on trade and comparative advantage for the merits of trade. Here we limit attention to a single market at a time. Not all trade is barter. We can look at buyers in one country and sellers in another who “trade” goods for money. The recipient of the money uses it either to buy other goods in the foreign country or invests it in a stock, bond, or account in the foreign country. For more on this, check out the 36 th chapter in the Cowen and Tabarrok textbook. Supply and demand analysis can be used to illustrate: conditions for importing/exporting , and the effects of policies that alter the incentives to import/export, e.g., tariffs .
Art Vandelay ELAINE: (incredulity) Art Vandelay? This is my boyfriend? GEORGE: That's your boyfriend. ELAINE: What does he do? GEORGE: He's an importer. ELAINE: Just imports? No exports? GEORGE: (getting irritated) He's an importer-exporter. Okay? ELAINE: Okay. So, I'm dating Art Vandelay. What is the problem we're discussing? GEORGE: (thoughtful) Yes. Yes. ELAINE: (sighs) Yi-yi-yi. (Elaine and George go into another bout of deep thought.) ELAINE: Ah! (explaining, with hand gestures) How 'bout this? How about, he's thinking of quitting the exporting, and just focusing in on the importing. And this is causing a problem, because, why not do both? [from Seinfeld episode 125: “The Cadillac (part 2)”]
Autarchy and free trade The possibility of imports (or exports) can be added to a diagram of the market quite easily. The usual equilibrium refers to domestic producers and consumers only. A horizontal line indicates the price at which the good could be imported from foreign countries, i.e., the world price . You can easily show the free trade equilibrium, quantity of imports and quantity of domestic production.
Effects on gains from trade in the market The lower price of imports explains both the benefits of free trade and a source of opposition to it. It increases consumer surplus by enabling more people to buy the good—and at a lower price. But it decreases producer surplus by substituting imports for domestic production and reducing the price for which domestic producers sell output. See graphs on the following slides.
Autarchy The usual division of gains from trade between consumers and producers.
Free trade Some gains get shifted from producers to consumers. Overall gains from trade are larger. Observe the trapezoid that is transferred from sellers to buyers. And the triangle (below autarchy equilibrium) that is newly generated gains.
Protectionism The reduction in producer surplus resulting from free trade is one motive for protectionist trade policy, e.g., tariffs (taxes on imports), import quotas (limits on the quantity of imports), regulations that burden foreign (but not domestic) producers.

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