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International Trade. Another CS/PS argument. Let’s look at what happens in the market for steel as we decide whether or not to participate in international trade. Step One: Compare our domestic equilibrium price to the world price of steel

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International trade

International Trade

Another CS/PS argument


International trade1

Let’s look at what happens in the market for steel as we decide whether or not to participate in international trade.

  • Step One: Compare our domestic equilibrium price to the world price of steel

    • World price = price of a good that prevails in the world market for that good

International Trade


International trade2

  • Step One: Compare our domestic equilibrium price to the world price of steel

    • World price = price of a good that prevails in the world market for that good

  • If the world price is higher = we will export steel

  • If the world price is lower = we will import steel

  • We are essentially looking at comparative advantage!

International Trade


International trade3

Let’s say we are exporting the good. Here’s our graph: world price of steel

International Trade


International trade4

Who is better off? world price of steel

Who is worse off?

International Trade


International trade5

Who is better off? world price of steel

DOMESTIC PRODUCERS

Who is worse off?

DOMESTIC CONSUMERS

International Trade


International trade6

What about the economy as a whole? world price of steel

International Trade


International trade7

What about the economy as a whole? world price of steel

BETTER OFF because producer surplus has increased more than consumer surplus decreased

International Trade


International trade8

Let’s say we are importing the good. Here’s our graph: world price of steel

International Trade


International trade9

Who is better off? world price of steel

Who is worse off?

International Trade


International trade10

Who is better off? world price of steel

DOMESTIC CONSUMERS

Who is worse off?

DOMESTIC PRODUCERS

International Trade


International trade11

What about the economy as a whole? world price of steel

International Trade


International trade12

What about the economy as a whole? world price of steel

BETTER OFF because the gains to consumers outweigh the loss to producers.

International Trade


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