Application: International Trade Chapter 9. Export Industries If a country has a comparative advantage in a good or service, the world price will be above.

Application: International Trade

Chapter 9

Export Industries

If a country has a comparative advantage in a good or service, the world price will be above the domestic (no-trade) price.

The country will export those goods and services for which it has a comparative advantage.

Figure 1The Equilibrium without International Trade

Copyright © 2004 South-Western

Consumersurplus

Producersurplus

Priceof Steel

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Domesticsupply

Domesticdemand

Equilibriumprice

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Figure 2 International Trade in an Exporting Country


Priceof Steel

0Quantityof Steel

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price

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Figure 3 How Free Trade Affects Welfare in an Exporting Country


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Welfare effects of an export industry

Consumers are worse off—they consume less at higher prices.

Producers are better off—they produce more at higher prices.

Producers’ gains > consumers’ losses.

Net gain from trade.

Imports

If a country does not have a comparative advantage, the world price will be below the domestic (no trade) price.

Figure 4 International Trade in an Importing Country


Priceof Steel

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of Steel

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Figure 5 How Free Trade Affects Welfare in an Importing Country


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Figure 5 How Free Trade Affects Welfare in an Importing Country


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Tariffs

Taxes on imports, used to discourage importing and protect domestic industry.

Figure 6 The Effects of a Tariff


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Deadweight Loss

Import Quotas

Government restricts quantity of imports.

Licenses are assigned to exporters.

Figure 7 The Effects of an Import Quota


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Arguments for Restricting Trade

1. Jobs

2. National Security

3. Infant Industry

4. Unfair competition

5. Protection as a bargaining chip

The first era, from the late 1800's to World War I, was driven by falling transportation costs, thanks to the steamship and the railroad. That was Globalization 1.0, and it shrank the world from a size large to a size medium. The second big era, Globalization 2.0, lasted from the 1980's to 2000, was based on falling telecom costs and the PC, and shrank the world from a size medium to a size small. Now we've entered Globalization 3.0, and it is shrinking the world from size small to a size tiny. That's what this outsourcing of white-collar jobs is telling us — and it is going to require some wrenching adjustments for workers and political systems.

--Thomas Friedman, NYT 3/4/04

Shaking up trade theory' has some interesting points but reflects confusions in the public debate rather than dissensions in trade theory. The [Paul A.] Samuelson paper is not about offshoring of services through the Internet or other mediums, which created a panic wave, but really about a different and indeed conventional question that has recurred for half a century: Can changes such as productivity increases outside the U.S. hurt the U.S.?

Thus, imagine that you are exporting aircraft, and new producers of aircraft emerge abroad. That will lower the price of your aircraft, and your gains from trade will diminish. You have to be naive to believe that this can never happen. But you have to be even more naive to think that the policy response to the reduced gains from trade is to give up the remaining gains as well.

The critical policy question we must address is: When external developments, such as the growth of skills in China and India, for instance, do diminish the gains from trade to the U.S., is the harm to the U.S. going to be reduced or increased if the U.S. turns into Fortress America? The answer is: The U.S. will only increase its anguish if it closes its markets. Every trade economist understands this.

Jagdish BhagwatiArvind PanagariyaColumbia University, New York

End of Chapter Problems

9:10

When the government of Tradeland decides to impose an import quota on foreign cars, three proposals are suggested: (1) Sell the licenses in an auction. (2) Distribute the licenses in a lottery. (3) Let people wait in line and distribute the licenses on a first-come, first-served basis. Compare the deadweight losses of the three policies.

Application: International Trade Chapter 9. Export Industries If a country has a comparative advantage in a good or service, the world price will be above.

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