Chapter 6: International Trade

Playconomics, LHS 1
 International Trade

How much to import or export?

What happens if the government intervenes by
implementing trade policies?

Playconomics, LHS 2
 International Trade

Definitions:
The Domestic Price represents the equilibrium
price that would occur in a country if no
international trade is allowed.
The World Price represents the equilibrium price
on the international market.

Playconomics, LHS 3
 International Trade
Definitions:
A Small Open Economy is an economy that
participates in international markets, but its
production (or consumption) is small enough
compared to the rest of the world that its supply
(or demand) does not affect the world price.
A Closed Economy is an economy that does not
engage in international trade. Also known as
autarky.
Playconomics, LHS 4
 International Trade

Has a certain Pd (domestic price), and

takes Pw (world price) as given
no seller will accept less than Pw as he can
always sell overseas at Pw;
no buyer will pay more than Pw as she can
always buy from overseas at Pw.

Playconomics, LHS 5
 A. Exporting
Say Pd = $10 and Pw = $15

Playconomics, LHS 6
P* = Pd = $10 P* = Pw = $15
 A. Exporting If Pd < Pw
Say Pd = $10 and Pw = $15 Exporter!!!

Playconomics, LHS 7
P* = Pd = $10 P* = Pw = $15
 A. Exporting

Why we generally want

countries to open up to trade?

Playconomics, LHS 8
 A. Exporting Gains from
Say Pd = $10 and Pw = $15 Trade!

Playconomics, LHS 9
P* = Pd = $10 P* = Pw = $15
 A. Exporting

Definition:
The Gains from Trade capture the extra surplus
available in an open economy compared to a
closed economy.

Playconomics, LHS 10
 A. Exporting

The Gains from Trade come from

international consumers (at the
expense of domestic consumers
surplus)!

Playconomics, LHS 11
 B. Importing
Say Pd = $3 and Pw = $2

Playconomics, LHS 12
P* = Pd = $3 P* = Pw = $2
 B. Importing
If Pd > Pw
Say Pd = $3 and Pw = $2
Importer!!!

Playconomics, LHS 13
P* = Pd = $3 P* = Pw = $2
 B. Importing

Why we generally want

countries to open up to trade?

Playconomics, LHS 14
 B. Importing
Say Pd = $3 and Pw = $2

Gains from
Trade!

Playconomics, LHS 15
P* = Pd = $3 P* = Pw = $2
 B. Importing

The Gains from Trade come from

larger surplus for domestic consumers
(who now buy at lower prices)!

Playconomics, LHS 16
 Additional Benefits from Trade
have access to a wider variety of goods
(Italian soft drinks, Indian movies),
may be able to take advantage of
economies of scale by selling to a larger market
(bauxite, copper),
or oligopolies might face
international competition, reducing their market
power (bookstores),
is faster and easier.

Playconomics, LHS 17
 C. Trade Restrictions: Tariffs

Definition:
An Import Tariff represents a tax on imported
goods or services.

Playconomics, LHS 18
 C. Trade Restrictions: Tariffs
Say Pw = $15 & t = $10 Pd = Pw + t = $25 (all books)

P* = Pw = $15 Playconomics, LHS P* = Pd = $25 19

 C. Trade Restrictions: Tariffs

Domestic BUT
domestic
is a tariff good or bad?

Playconomics, LHS 20
 C. Trade Restrictions: Tariffs
Say Pw = $15 & t = $10 Pd = Pw + t = $25 (all books)
Loss

P* = Pw = $15 Playconomics, LHS P* = Pd = $25 21

 C. Trade Restrictions: Tariffs

Domestic BUT
domestic
Deadweight Loss Tariff is bad!

Playconomics, LHS 22
 D. Trade Restrictions: Quotas

Definition:
An Import Quota represents a quantity limit on
the amount of goods or services permitted to be
imported.

Playconomics, LHS 23
 D. Trade Restrictions: Quotas
Say q = 2,000 books per month

Q*, P*=$25 Playconomics, LHS Q* = Qd+q, P*=$25 24

D. Trade Restrictions: Quotas

Domestic BUT
domestic
is a quota good or bad?

Playconomics, LHS 25
 D. Trade Restrictions: Quotas
Say q = 2,000 books per month

Loss

Q*, P*=$25 Playconomics, LHS Q* = Qd+q, P*=$25 26

 D. Trade Restrictions: Quotas
Say q = 2,000 books per month

Importers Bonus!
Q*, P*=$25 Playconomics, LHS Q* = Qd+q, P*=$25 27
 D. Trade Restrictions: Quotas

Domestic BUT
domestic
Deadweight Loss Quota is bad!

Playconomics, LHS 28