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09 International Trade

Benefit

Graphs

Consumer Surplus

Benefit that consumers enjoy when they purchase goods and services

\[ \begin{aligned} &= \text{area under demand curve and above equilibrium price line} \\ &= \text{willingness to pay - total payment} \\ &= \int \limits_0^{Q} Q_d - \int \limits_0^{P} P_d \end{aligned} \]

if the value associated with a commodity is

  • high, surplus is high
  • low, surplus is low

\(CS \propto \frac 1 {P_{eq}}\)

\(CS \propto \frac{1}{|e|}\)

P \(Q_d\) \(P_{eq} - P\)
1 8 6
2 7 4
3 6 2
4 5 0
5 4 -2

Let’s say that 4 is the equi price

The Consumer surplus = 6 + 4 + 2 = 12

Supplier Surplus

It is basically the profit

\[ \begin{aligned} &= TR - \text{Cost} \\ &= \text{area above supply curve and below price line} \\ &= \int \end{aligned} \]
P \(Q_s\) \(P_{eq} - P\)
1 1 3
2 2 2
3 3 1
4 4 0
5 5 -1

PS = 3 + 2 + 1 = 6

\(PS \propto P_{eq}\)

\(PS \propto |e|\)

Total Benefit

sum of producer and consumer surplus

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

Export

  • the supply in domestic market decreases
  • domestic price increases
  • domestic demand decreases

Then the export = domestic supply - domestic demand

Effects

graph

CS decreases

PS increases

However, there is a net benefit from trade (small triangle)

Import

  • the supply in domestic market inc
  • domestic price dec
  • domestic demand inc

Then the import = domestic demand - domestic supply

Effects

CS increases

PS decreases

IDK

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

T

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

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

Benefits of Free Trade

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

Why do Tariffs exist

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
Last Updated: 2023-01-25 ; Contributors: AhmedThahir

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