Everyone is better off with trade than with no trade USA plan B Produce Consume

Everyone is better off with trade than with no trade

This preview shows page 314 - 330 out of 417 pages.

Everyone is better off with trade than with no trade! USA (plan B) Produce Consume X=P-C Computers 18 13 5 Coffee 12 =12-(-13)=25 -13 (we import) Brazil (plan E) Produce Consume X=P-C Computers 0 5 -5 (we import) Coffee 32 32-13=19 5*2.6=13 In reality, this occurs across all goods and all countries. Trade Facts Economic Basis PPF and trade Absolute / Comparativ e Advantage Terms of Trade
Image of page 314
Key Ideas and Things To Think About Note: This is NOT a study guide – i.e. do not limit yourself to these items when studying
Image of page 315
Key Ideas
Image of page 316
Things To Think About
Image of page 317
Topic 13 – Small Country Trade Model
Image of page 318
Agenda Trade Equilibrium How to look at trade in a supply/demand graph Trade Barrier: Why we see them Effects of a Trade Barrier Removing Barriers to Trade A brief history of the World Trade Organization
Image of page 319
Motivating Questions What happens when your country is too small to affect world prices? What happens when ALL countries are too small to affect world prices? If trade is so great, why do we have tariffs, import quotas, and lots of bureaucratic red tape involved in importing?
Image of page 320
Trade Equilibrium Once again it’s all about supply and demand Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade
Image of page 321
First, some definitions Exports: Goods and Services that are produced domestically and sold abroad Imports: Goods and Services that are produced abroad and sold domestically Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade
Image of page 322
Small countries are simple cases to look at We’ll make the following assumptions about a small country: 1. Whatever amount they demand can be supplied. 2. Demand doesn’t affect world prices. 3. Supply first comes from domestic firms, while the remainder comes from foreign firms. (say, tiny transport costs) Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade
Image of page 323
World vs. Domestic Prices Domestic Price = intersection of supply and demand curve. (units are in some common currency. Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade Wheat P of Wheat Supply curve Demand curve P* Q*
Image of page 324
World Price with Free Trade Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade Intersection of World supply and World demand curves • World supply curve: for each price, add up for each country how much that country would supply. • World demand curve: for each price, add up for each country how much that country would demand.
Image of page 325
Wheat P Country A Country B World QsA QsB QsA +QsB World Supply Curve
Image of page 326
World Demand Curve Wheat P Country A Country B World QdA QdB QdA +QdB
Image of page 327
When world price is lower than domestic price Trade Equilibrium Trade Barrier Justifications Effects of a Trade Barrier Removing Barriers to Trade Wheat P of Wheat Supply curve Demand curve P* World Price Pw Qs Qd Imports
Image of page 328
When world price is higher than domestic price Trade Equilibrium Trade Barrier Justifications
Image of page 329
Image of page 330

You've reached the end of your free preview.

Want to read all 417 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes