The Principles of Economics

9     Application: International Trade

9-1 The Determinants of Trade 

9-1a The Equilibrium without Trade

-Domestic prices adjust to balance the quantity supplied by domestic sellers and the quantity demanded by domestic buyers. 

9-1b The World Price and Comparative Advantage

-Domestic prices reflect the opportunity cost of the country.

-world price: the price of a good that prevails in the world market for that good. 

9-2 The Winners and Losers from Trade

9-2a The Gains and Losses of an Exporting Country

-Price takers simply take the price as it's given. 

-The smallfieconomy assumption says that one country has little effect on the world's markets. 

-Domestic prices often rise when trading, in order to reach the world price.

-The quantity of goods being supplies is larger than the demand to sell/export to other countries. 

9-2b The Gains and Losses of an Importing Country

-Domestic producers consumers of a good are better off, unlike domestic producers, who're worse off. 

-Trading gives rise to a nations economic well-being.

9-2c The Effects of a Tariff

-tariff: a tax on goods produced abroad and sold domestically. 

-With tariffs, demands decrease while supplies increase.

-A tax on textile imports in Isoland would only make sense if Isoland becomes a textile importer, not a textile exporter.

-Tariff raise the prices of imported textiles above the world price and because of this, textiles are often priced depending upon the amount of the tariff. 

-Tariffs reduce the rate of consumption because of increased prices. 

9-2d The Lessons for Trade Policy

-If the world price is higher than the prices in our country, we have to export. 

9-2e Other Benefits of International Trade

-International increases the variety of goods, lowers the costs through economies of scale, increases competition, increases productivity, and enhances flows of ideas. 

-Goods from different countries are not identical because of free trade, which allows consumers in all countries to have a variety of goods to choose from. 

-Economies of scale are when some goods can be produced at lower costs only if they can be produced in large quantities. 

-International trade allows productive firms to expand their markets. 

-By transferring technological advances, exchanging goods are positively influenced by those advances. 

9-3 The Arguments for Restricting Trade

Ex. free trade in textiles could cause the price of textiles to fall, which would reduce the quantity of the textiles produced in Isoland. Loss of textiles would cause a loss in employment in the Isolandian textile industry. 

9-3b The National-Security Argument

-Economists know that key industries must be protected but they fear that consumers may be negatively effected. 

9-3c The Infant-Industry Argument 

-Economics are typically skeptical about the infant-industry argument. 

9-3d The Unfair-Competition Argument

-Some people argue that free trade is only desirable if all countries play by the same rules.

9-3e The Protection-as-a-Bargaining-Chip Argument

-Unilateral approaches include removing trade restrictions on its own. 

-Multilateral approaches include the reduction of trade restrictions. 

9-4 Conclusion

-Trade allows production to be allocated and raises the living standard, whether it be at home or abroad.