THE BASIC THEORY USING DEMAND AND SUPPLY CHAPTER 2.

THE BASIC THEORY USING THE BASIC THEORY USING DEMANDDEMAND

AND SUPPLYAND SUPPLY

CHAPTER 2CHAPTER 2

22

Key Questions About Key Questions About International TradeInternational Trade

1.1. Why do countries trade? What is the basis for Why do countries trade? What is the basis for trade, especially the product (commodity) trade, especially the product (commodity) composition? composition?

2.2. For each country, what are the overall gains (or For each country, what are the overall gains (or losses) from trade?losses) from trade?

3.3. What are the effects of trade on each country’s What are the effects of trade on each country’s economic structure? Production, Consumption. economic structure? Production, Consumption.

4.4. What are the effects of trade on the distribution of What are the effects of trade on the distribution of income within each country? Winners, Losers.income within each country? Winners, Losers.

33

Figure 2.1Figure 2.1

44

Consumer surplusConsumer surplus

Consumer surplus is the increase in the Consumer surplus is the increase in the economic well-being of consumers who are economic well-being of consumers who are able to buy the product at a market price able to buy the product at a market price lower than the highest price that they are lower than the highest price that they are willing and able to pay for the product. A willing and able to pay for the product. A major use of consumer surplus is to major use of consumer surplus is to measure the impact on consumers of a measure the impact on consumers of a change in market price.change in market price.

55

Producer surplusProducer surplus

Producer surplus is the increase in the Producer surplus is the increase in the economic well-being of producers who are economic well-being of producers who are able to sell the product at a market price able to sell the product at a market price higher than the lowest price that would have higher than the lowest price that would have drawn out their supply. A major use of drawn out their supply. A major use of producer surplus is to measure the impact producer surplus is to measure the impact on producers of a change in market price.on producers of a change in market price.

66

Figure 2.2Figure 2.2

77

Two national markets and the Two national markets and the opening of trade opening of trade

If you were the first person to notice this If you were the first person to notice this situation, could you make a profit?situation, could you make a profit?

Let’s say that the United States is willing to Let’s say that the United States is willing to open up to free trade and integrate into the open up to free trade and integrate into the world market. If it does this, the world price world market. If it does this, the world price will also be the price within the United will also be the price within the United States. How much will the United States States. How much will the United States want to import? want to import?

88

Two national markets and the Two national markets and the opening of tradeopening of trade

What will happen with free trade? When What will happen with free trade? When there is ongoing free trade, what is the there is ongoing free trade, what is the equilibrium world price? equilibrium world price?

99

Figure 2.3Figure 2.3

1010

Two national markets and the Two national markets and the opening of tradeopening of trade

What group is made happier by the shift What group is made happier by the shift from no trade to free trade? What group is a from no trade to free trade? What group is a loser? Can we somehow say that the loser? Can we somehow say that the country gains from free trade?country gains from free trade?

1111

Figure 2.4Figure 2.4

1212

Questions Questions

The United States exports a substantial The United States exports a substantial amount of scrap iron and steel to Japan and amount of scrap iron and steel to Japan and other countries. Why do some U.S. users of other countries. Why do some U.S. users of scrap iron and steel support a prohibition on scrap iron and steel support a prohibition on these exports?these exports?

1313

Questions Questions

The equation for the demand curve for writing paper in A The equation for the demand curve for writing paper in A country is Qcountry is QDD=350-(P/2); the equation for the supply =350-(P/2); the equation for the supply curve for writing paper in A is Qcurve for writing paper in A is QSS=-200+5P=-200+5P

1.1. What are the equilibrium price and quantity if there is no What are the equilibrium price and quantity if there is no international trade?international trade?

2.2. What are the equilibrium quantities for A if the nation can What are the equilibrium quantities for A if the nation can trade freely with the rest of the world at a price of trade freely with the rest of the world at a price of 120yuan?120yuan?

3.3. What is the effect of the shift from no trade to free trade What is the effect of the shift from no trade to free trade on A consumer surplus? On A producer surplus? What is on A consumer surplus? On A producer surplus? What is the net national gain or loss for A?the net national gain or loss for A?

1414

QuestionsQuestions

Explain what is wrong with the following Explain what is wrong with the following statement: “Trade is self-eliminating. statement: “Trade is self-eliminating. Opening up trade opportunities drives prices Opening up trade opportunities drives prices and costs into equality between countries. and costs into equality between countries. But once prices and costs are equalized, But once prices and costs are equalized, there is no longer any reason to trade the there is no longer any reason to trade the product from one country to another, and product from one country to another, and trade stops.”trade stops.”