Principles Of Microeconomics Chapter 9 PDF

Principles of Microeconomics Chapter 9 Shuo Xu October 24, 2024 1/13 Determinants of Trade I In Chapter 3, we learned that international trade is beneficial to both trading parties. I It did not explain how the internation...

Principles of Microeconomics Chapter 9 Shuo Xu October 24, 2024 1/13 Determinants of Trade I In Chapter 3, we learned that international trade is beneficial to both trading parties. I It did not explain how the international marketplace achieves these gains from trade or how the gains are distributed among the various market participants. I Today, we use welfare analysis and small country model to study the winners and losers of international trade. 2/13 World Price I World Price: The price of a good that prevails in the world market for that good I When a country open up to world trade. We compare the equilibrium price under autarky with the world price. I If the world price is higher, then the country is an exporter. I If the price under autarky is higher, then the country is an importer. I If the price under autarky is lower than the world price, the country has the comparative advantage. 3/13 Welfare Analysis of Exporter 4/13 Welfare Analysis of Importer 5/13 Welfare Analysis under Tariff 6/13 Welfare Analysis under Quota 7/13 How to Solve Quota Problems A general method to solve quota problems: 1. Find the initial equilibrium under the world price, taking free trade into consideration. 2. Find the new supply curve: For each price level, increase the quantity supplied by the amount of quota. 3. Find the new equilibrium: The intersection of the new supply curve and the demand curve pins down the equilibrium. 4. Find the difference in surplus/loss. 8/13 How to Solve Quota Problems Solution to the Quota Example: 1. When price was at 80. The equilibrium quantity is 22. 2. The supply curve increase by 5 units for each price level. 3. The new equilibrium price level is 90. The amount of goods exchanged is 17. 4. Domestic Producer Surplus increases. Domestic Consumer Surplus decreases. DWL is the difference between the change in consumer surplus and the change in producer surplus. 5. Ownership Matters!: If a domestic producer/consumer/government owns the quota rent, then the rent is part of the domestic economic surplus. Otherwise, it is a deadweight loss. 9/13 How to Solve Tariff Problems 10/13 How to Solve Tariff Problems A general method to solve tariff problems: 1. Find the initial equilibrium under the world price, taking free trade into consideration. 2. Find the new price level: The new price is t dollar higher than the world price. 3. Find the new equilibrium, taking free trade into consideration: The intersection of the new price level curve and the demand curve pins down the equilibrium. 4. Find the difference in surplus/loss. 11/13 How to Solve Tariff Problems Solution to the Tariff Example: 1. The price was Pw , and the equilibrium quantity was DF. 2. The new price level is Pw + t. 3. The new equilibrium quantity is DT. 4. Domestic Producer Surplus increases. Domestic Consumer Surplus decreases. 5. Government collects tariff revenue. If quota rent is earned by foreigners, then the domestic DWL is smaller than DWL under quota. 12/13 Equivalence of Quota and Tariff Suppose the small country imports goods (i.e. PA > PW ). I Given a tariff t, and the world price Pw , imposing the following quota has the same effect as the tariff: Quota(t, Pw ) = Quantity Demanded(Pw +t)−Quantity Supplied(Pw +t). I Given a quota γ, and the world price Pw , imposing the following tariff has the same effect as the quota: γ = Quantity Demanded(Pw + t) − Quantity Supplied(Pw + t). 13/13