Principles of Economics Chapter 9 – Flashcards

the ability to produce a good at a lower opportunity cost than another producer

consumer surplus + producer surplus

the price of a good that prevails in the world market for that good

If the world price is higher than the domestic price, they will export once trade is permitted. If world price is lower than domestic price, they will import. Comparing world price to domestic price before trade indicates whether you have a comparative advantage in producing said good. If domestic price is low, cost of production is low for good, suggesting they have a comparative advantage.

Once trade is allowed, the domestic rises to the equal the world price. No seller accepts less than the world price, and no buyer would pay more than the world price. While domestic quantity supplied and domestic quantity demanded differ, the market is still in equilibrium because there is now another participant (the rest of the world) Trade forces domestic prices to rise to world price. Domestic producers benefit cause they sell at higher price. Domestic consumers are worse off cause they buy at higher price.

When a country allows trade and becomes an exporter of a good, domestic producers of the good are better off, and domestic consumers of the good are worse off Trade raises the economic well being of a nation in the sense that the gains of the winners exceed the losses of the losers.

Now suppose domestic price is above the world price. After trade, domestic price must equal the world price. The difference between domestic quantity demanded and domestic quantity supplied is bought from other countries and country becomes an importer. When trade forces the domestic price to fall, domestic consumers are better off, and domestic producers are worse of because they have to sell at a lower price.

When a country allows trade and becomes an importer of a good, domestic consumers of the good are better off, and domestic producers of the good are worse off. Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers.

WILL trade make everyone better off? Probably not. Compensation for the losers from international trade is rare. Without such compensation opening an economy to international trade is a policy that expands the size of the economic pie, while perhaps leaving some participants in the economy with a smaller size

a tax on goods produced abroad and sold domestically

Will have no effect if country is an exporter of the good. Tariff raises the price of imported goods above the world price by the amount of the tariff. Domestic suppliers now sell their good for the world price plus the amount of the tariff. Thus the price of the good (imported and domestic) rises by the amount of the tariff and is now closer to the price that prevails w/o trade. **The tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade. Because the tariff raises the domestic price, sellers are better off, and consumers are worse off. Also, the government raises revenue.

quantity of after tariff imports times the size of the tariff

Change in consumer surplus (negative) + Change in Producer Surplus (positive) + Change in Government Revenue (positive) The fall in total surplus is called the deadweight loss of the tariff

Tariff causes DWL because it is a type of tax. Like most taxes it distorts incentives and pushes the allocation of scarce resources away from the optimum. 2 Effects: - when tariff raises domestic prices above world price, domestic producers increase production. Even though cost of making incremental units exceeds the cost of buying them at the world price, the tariff makes it profitable for domestic producers to manufacture them nonetheless. - when tariff raises the price that consumers have to pay, it encourages them to reduce consumption of textiles. Even though consumers value these incremental units at more than the world price, the tariff induces them to cut back their purchases.

- Increased Variety of Goods: free trade gives consumers in all countries greater variety from which to choose - Lower Costs through economies of scale: some goods can be produced at a low cost only if they are produced in large quantities - phenomenon called economies of scale. Free trade gives access to larger world markets and allows them to realize economies of scale. - Increased Competition: Opening up trade fosters competition and gives the invisible hand a better chance to work its magic - Enhanced flow of ideas: the transfer of technological advances around the world is often thought to be linked to the trading of the goods that embody those advances.

free trade would cause the price of a good to fall reducing the quantity produced, and thus reducing employment in the industry. Yet free trade creates jobs as well. Other countries obtain resources to buy other goods from the country, and those workers move to the industry that has the comparative advantage. The transition may impose hardship, but it allows the nation as a whole to enjoy a higher standard of living. Opponents of trade say that everything can be produced more cheaply abroad.

When an industry is threatened with competition from other countries, opponents of free trade argue the industry is vital for national security. Economists acknowledge that protecting key industries may be appropriate when there are legitimate concerns. Yet they fear that this argument may be used to quickly by producers eager to gain consumers' expense.

New Industries argue for temporary trade restrictions to help them get started. After a period of protection, these industries will mature and be able to compete with foreign firms. Similarly older industries argue that they need protection to help them adjust to new conditions. Economists are skeptical because this argument is difficult to implement in practice. Government would need to decide which industries will eventually be profitable and decide whether the benefits of establishing these industries exceed the costs of this protection to consumers.

if firms in different countries are subject to different laws and regulations then it is unfair to expect the firms to compete in the international market place.

many policy makers argue for free trade, but at the same time argue that trade restrictions can be useful when we bargain with trade partners. they claim that the threat of a trade restriction can help remove a trade restriction already imposed by a foreign government. Problem is, the threat may not work.