Trade¶

We can live without trade, but the standard of living will be lower

Trade happens only when it is cheaper to import than to produce it yourself

we have already covered all this in principle of economics trade point

When we trade, the total availability of goods and services increases, ie the post-trade PPC exceeds the pre-trade PPC

Before trade, the production and consumption points will be the same After trade, the consumption point exceeds the production point

Factors of Trade¶

1. Preferences/Tastes
2. Cost (what is the amount expected of the customer)
3. Budget/Income (what is available to the customer)
4. Threshold/Willingness to make the trade

Bases for Trade¶

shows what a country should import/export

these minimize the opportunity costs

1. Calculate OC of all commodities in both countries \(= \frac{\text{commodity production you lose out on}}{\text{what you chose to produce}}\)
2. Compare OC of each commodity b/w the countries
3. The country with the lower OC for every commodity will produce that commodity

Empirical Tests of the Ricardian Model¶

cost \(\propto \frac{1}{\text{productivity}}\)

eg: AC ka efficiency

US vs UK productivity¶

Relative exports of 2 countries \(\propto\) Relative output/productivity

US vs Japanese costs¶

Relative exports of 2 countries \(\propto \frac{1}{\text{Relative labor cost}}\)

International Trade¶

When you open for trade, the domestic price tends to the international price.

country will

• export if domestic price < international price
• import if domestic price > international price

Benefits of Free Trade¶

1. increased variety of goods
2. lower costs of production
3. increased competition
4. higher incentives
5. better ideas

The total surplus is always +ve in free trade, due to specialization and benefits of scale.

Tariffs¶

Tax on imports

it is economically bad, the losses of the consumers is not compensated but it is socially good

Tariffs are better than quota, because it generates revenue for the govt Quota - govt restricts the quantity of commodity imported/exported

Effects¶

Assuming that the country is small, such that tariffs does not affect world price

• imports and total surplus decreases (closer to no-trade equi), but
• consumer surplus dec
• producer surplus inc
• domestic price increases
• domestic suppliers are protected
• unemployment doesn’t rise
• Govt earns tariff revenue = quantity imported x tariff rate

the reduction in total surplus due to a govt policy is called deadweight loss of the policy

Why Tariffs?¶

we need tariffs because

without tariffs

1. jobs are shipped abroad
2. national security endangered
3. highly dependent on another country
4. this is why US is able to interfere in other countries policies, as other countries are dependent on them
5. infant industries protected
6. avoids unfair competition
7. cheap labor
8. environmental standards
9. tariffs as a political tool
10. reduces inequality

Few Caveats¶

• Fairness: Few countries over-use their power
  • Exploitation of workers in developing nations

Pareto optimal policy¶

Any govt policy, where some people benefit and some lose out, is optimal if those who benefit can compensate for the people who lose out

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