International trade
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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

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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

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

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

  • 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


Let’s say we are exporting the good. Here’s our graph:

International Trade


Who is better off?

Who is worse off?

International Trade


Who is better off?

DOMESTIC PRODUCERS

Who is worse off?

DOMESTIC CONSUMERS

International Trade


What about the economy as a whole?

International Trade


What about the economy as a whole?

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

International Trade


Let’s say we are importing the good. Here’s our graph:

International Trade


Who is better off?

Who is worse off?

International Trade


Who is better off?

DOMESTIC CONSUMERS

Who is worse off?

DOMESTIC PRODUCERS

International Trade


What about the economy as a whole?

International Trade


What about the economy as a whole?

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

International Trade


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