Trade theory focuses on three basic questions: a) What products to import and export? b) How much to trade?, and c) With whom to trade? • Some theories explain trade patterns that exist in the absence of governmental interference, and some theories explain what governmental actions should strive for in trade. I - INTRODUCTION
P D S D.P. Q E.Q. TheEquilibrium without International Trade. When an economy cannot trade in world markets, the price adjusts to balance domestic supply and demand. This figure shows consumer and producer surplus in an equilibrium without international trade for the steel market in the imaginary country of Isoland.
B – Absolute Advantage: a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for goods produced by other countries. Basic Argument: you should never produce goods at home that you can buy at lower cost form other countries. Absolute advantage – exists potential for gains in trade
1. Natural Advantage: a country may have a natural advantage in producing a product because of climatic conditions, access to a certain natural resources, or availability of an abundant labour force 2. Acquired Advantage: industrial policy C – Comparative Advantage: In his 1817 book “Principles of Political Economy”, David Ricardo says that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if it could produce them more efficiently itself. In other words, nations should produce those goods for which they have the greatest relative advantage
The World Price and Comparative Advantage The first issue our economists take up is whether Isoland is likely to become a steel importer or a steel exporter. In other words, if free trade were allowed, would Isolandians end up buying or selling steel in world markets? To answer this question, the economists compare the current Isolandian price of steel to the price of steel in other countries. We call the price prevailing in world marketsthe world price. If the world price of steel is higher than the domestic price, then Isoland would become an exporter of steel once trade is permitted. Isolandian steel producers would be eager to receive the higher prices available abroad and would start selling their steel to buyers in other countries. Conversely, if the world price of steel is lower than the domestic price, then Isoland would become an importer of steel. Because foreign sellers offer a better price, Isolandian steel consumers would quickly start buying steel from other countries.
P Export W.P. D.P. E.Q. Q The Gains and Losses of an exporting country International trade in an exporting country. Once trade is allowed, the price rises to equal the world price. The supply curve shows the quantity of steel produced domestically, and the demand curve shows the quantity consumed domestically. Exports from Isoland equal the difference between the domestic quantity supplied and the quantity demanded at the world price.
P S D D.P. W.P. Import E.Q. Q THE GAINS AND LOSSES OF AN IMPORTING COUNTRY International trade in an importing Country. Once trade is allowed, the domestic price falls to equal the world price. The supply curve shows the amount produced domestically, and the demand curve shows the amount consumed domestically. Imports equal the difference between the domestic quantity demanded and the domestic quantity supplied at the world price
Tariff revenue P S D Tariff D.P. W.P. Q4 Q3 Q1 Q2 Q5 Q Deadweight loss Tariff – a tax on good produced abroad and sold domestically The Effects of a Tariff. A tariff reduces the quantity the quantity of imports and moves a market closer tj the equilibrium that would exist without trade. Total surplus falls by an amount equal to area D + F. These two triangles represent the deadweight loss from the tariff
Price Of steel Domestic supply Equilibrium without quota Domestic supply + Import supply Quota A Isoland Price with Quota B Equilibrium with quota C E Price without quota D E F World price World price = G Imports without quota Domestic demand q1S q2S q2D q1D Quantity of steel Imports without quota Import quota - a limit on the quantity of a good that can be produced abroad and sold domestically The Effects of an Import Quota. An import quota, like a tariff, reduces the quantity of imports and moves a market closer to the equilibrium that would exist without trade. Total surplus falls by an amount equal to area D + F. These two triangles represent the deadweight loss from the quota. In addition, the import quota transfers E + E to whoever holds the import licenses
A tariff, like most taxes, has deadweight losses: The revenue raised would be smaller than the losses to the buyers and sellers. In this case, the deadweight losses occur because the tariff would move the economy closer to our current no-trade equilibrium. An import quota works much like a tariff and would cause similar deadweight losses. The best policy, from the standpoint of economic efficiency, would be to allow trade without a tariff or an import quota. The Case for Protection Protection saves jobs-to limit the number of importers tom prevent unemployment Some countries engage in unfair trade practices- For instance, Russia might threaten Kazakhstan to impose take out restriction on steal. But what is important for Kazakhstan Cheap foreign labor makes competition unfair- importer might follow aggressive competition. Protection safeguards national security-to be not almostly dependent on others because of National defense Protection safeguards infant industries- to protect small producers
Conclusion To sum up, I’d like to say that international trade, also it calls WTO; is used to exactly determine whether a country is importer or exporter. It’s very important to understand when the country is better off or worse off. We have learned in this chapter about comparative advantage. If our price I more than World price then we’re importers. In this case, the domestic producers are worse off and consumers are better off. Because while our price is more than W.P. it becomes unprofitable to produce product and sell goods cheaper than others. It leads to fall the domestic price to the W.P. And government can help to the domestic producer by imposing tariff or quota on imported goods. By instance, if we have comparative advantage then we’re exporters. It leads to raise the domestic price to the W.P. & profitable producing goods and selling them abroad. In this case producers are better off and domestic consumers are worse off. After studying this chapter and using determinants of comparative advantage, we can easily define whether we’re importers or exporter. Also it should be mentioned that a government always is better off when we’re importers or exporter.
Example for our conclusion about our country: We can say that our country is almostly an importing country, because we don’t have many factories to product a good and compete with other countries. But we have natural advantage, because of this we are exporters for some countries by selling oil, gas, etc. Because of five argument , the government imposed tariff and for some goods quotas. You know why our country dind’t enter to a WTO, Because of large amount of tariff. If we regret from imposing tariff, we can say that we’ll be depend from other countries.