International Trade Exam Review - Kermit Daniel, Spring 2025 - PDF

Introduction to Macroeconomics Lecture 7 International Trade Exam 1 Review 1  Today Gains from Trade Exam 1 Review Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 2  HW 4 Questions Comparative Advantage Taxes, tarif...

Introduction to Macroeconomics Lecture 7 International Trade Exam 1 Review 1  Today Gains from Trade Exam 1 Review Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 2  HW 4 Questions Comparative Advantage Taxes, tariffs Deadweight loss Binding & non-binding price controls Always benefits from trade? “Losing” at trade? Elasticity Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 3  Concepts and Distinctions Equilibrium Competitive Market Efficiency o Individual buyers and Opportunity Cost sellers are price Counterfactual takers: they do not affect the market Positive, Normative price Nominal, Real o At the market price, Stock, Flow buyers can buy all Income, Wealth they want, and sellers Saving, Savings can sell all they want Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 4  Positive, Normative Positive Statements about what is objectively true E.g., “Imposing a 25% tariff on steel will reduce consumer surplus” Normative Statements about what should be true E.g., “Imposing a 25% tariff on steel will make America better off” Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 5 Which country has a comparative advantage in Steel? U.S. has 50,000 labor hours available per month. U.S. productivity: Steel: 1 ton of steel per 500 hours of labor Soybeans: 1 ton of soybeans per 10 hours of labor Japan has 30,000 labor hours available per month. Japan productivity: Steel: 1 ton of steel per 625 hours of labor Soybeans: 1 ton of soybeans per 25 hours of labor Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 Demand curves show the relationship between P & Q P Demand curves show the relationship between price Marginal consumption is and quantity demanded worth $3,000 – consumption up to that point is worth more If the good is priced at $3000 $3,000 then consumers will buy 180 D Q 180 Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  Consumer surplus P Consumer surplus is the net value consumers receive Marginal consumption is from paying P less than the worth $3,000 – consumption CS up to that point is worth value they place on consumption more $3000 D Q 180 Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 8  Consumer surplus P If the good is priced at Marginal consumption is $2,500 then consumers will worth P – consumption up buy 200. Consumer surplus to that point is worth more increased $3000 CS $2500 If P = $2,500 then Q = 200 D Q 180 200 Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 9  Consumer surplus is larger when P is lower P Consumer surplus increases Marginal consumption is for two reasons: worth P – consumption up to that point is worth more 1. Original consumption of A 180 now provides additional CS (area B) $3000 2. At lower P consumption B C increases by 20 and this $2500 provides new CS (area C) D Q 180 200 Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 10  Consumer and Producer surplus P If the good is priced at $3,000 then producers will supply 180 S CS Producer surplus is the net $3000 Equilibrium value sellers receive from price PS receiving P greater than the cost of production D Q 180 Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 11 Price ceiling transfers PS to CS and creates a DWL Equilibrium Price = $3,000 P CS = A +D deadweight PS = + C +F+G loss = D + F S Total surplus = A A+C+D +F+G D $3000 Equilibrium Price ceiling of $2500 F price CS = A + C C PS = G $2500 Price Ceiling G Total surplus = D Q A+C +G 150 180 200 Ex-post Ex-ante Demand Shortage Demand Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  Shifts in the Demand Curve The demand curve Shows relationship between price and quantity demanded, other things being equal These “other things” are non-price determinants of demand Things that determine buyers’ demand for a good, other than the good’s price Changes in non-price determinants shift the D curve Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly access ible website, in whole or in part. 13  Shifts in Demand, Supply Curves Shifts in the demand curve Shifts in the supply curve are caused by changes in: are caused by changes in: Number of buyers Number of sellers Prices of substitutes Prices of inputs Prices of complements Taxes on output Income Productivity Tastes Production technology Expectations Expectations How does each shift the How does each shift the demand curve? supply curve? Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly access ible website, in whole or in part. 14  Shifting supply: What is the effect of a budget deficit? Interest The government runs a rate budget deficit, which reduces the supply of S loanable funds What is the effect r* on the quantity of loanable funds? What is the effect to D the interest rate? Q* Loanable funds Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 15  Shifting curves: Incidence of a tax Tax Incidence is the distribution of tax burden Tax burden—Who pays how much of the tax Tax burden is the difference between A) what buyers/sellers pay/receive with the tax in place, and B) what they paid/received when there was no tax The difference between A and B is determined by how responsive D and S are to changes in price (elasticity) The less responsive to price, the more the burden Incidence does not depend on who is assessed the tax Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 16 Tax incidence does not depend on who is taxed Output, the after-tax prices paid by buyers & sellers, and the incidence of the tax do not depend on who pays the tax SELLERS Taxed: Buyers pay Staxed new market price of $11, P S Sellers keep $9.50 after PB = $11.00 Tax paying tax $10.00 No-tax Equilibrium PS = $9.50 BUYERS Taxed: Sellers receive new market price of D $9.50, Buyers pay a total of Dtaxed $11 after paying tax Q 450 500 Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 17 The less responsive to price, the more the burden For example, if consumers’ demand is perfectly inelastic then they bear the entire burden of the tax, no matter who the tax is collected from P SELLERS Taxed: Buyers pay Staxed new market price of $11.50, PD = $11.50 Tax S Sellers keep $10 after paying the tax P = $10.00 No-tax S Equilibrium BUYERS Taxed: Sellers receive same market price of $10, Buyers pay a total of D $11.50 after paying the tax Q 500 Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 18 Example In this question you will analyze the effect of imposing a 100% tariff on Chinese imports. Walmart will represent US importers & consumers 1. Indicate the quantity of Chinese imports before & after the tariff 2. Indicate the price Walmart pays for imported Chinese goods before & after tariff 3. Indicate the price China receives before & after tariff 4. How much of the tariff do Walmart & China pay? 19 Example In this question you will analyze the effect of imposing a 100% tariff on Chinese imports. Walmart will represent US importers & consumers P2A 1. Indicate the quantity of Chinese imports before & P 2B,3B after the tariff 2. Indicate the price Walmart pays for imported Chinese P3A goods before & after tariff 3. Indicate the price China receives before & after tariff 4. How much of the tariff do Walmart & China pay? (P2A – P2B) & (P3A – P3B) Q1A Q1B 20  Markets Markets Equilibrium Potential buyers and Matching markets sellers interact o Identity of buyers, sellers, Voluntary exchange and/or good is important o Price alone does not clear Competition the market “Many” buyers & sellers Commodity markets Perfect competition: o Standardized good perfectly elastic D, S o Price clears the market Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 21  Competitive market equilibrium is efficient P Total surplus is maximized Buyers who value the good S most receive the good CS Sellers with the lowest production costs supply the P* Equilibrium good price PS Buyers who value the good more than it costs to D produce it, receive the Q good Q* Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 22  Demand and Supply What buyers and what sellers should trade? What is the efficient Q? Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 23  Actual Trading Pairs Which buyers and which sellers transacted who should not have? Why? Which buyers or sellers who should have transacted failed to? Why? Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 24  Actual Trading Pairs Which buyers and which sellers transacted who should not have? Why? Which buyers or sellers who should have transacted failed to? Why? Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 25  International Trade Analysis Production takes place Domestically & in the rest of the World Countries are Price Takers (“small economy” assumption)— actions have no effect on prices When a small economy engages in free trade, PW is the only relevant price to buyers and sellers: No buyer would pay more than PW (can buy the good for PW) No seller would accept less than PW (can sell good for PW) Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 26 Trade allows specialization by comparative advantage Airplanes NO TRADE: US Consumption is limited by US Production (C1) C2 U.S. TRADE: US Consumption Not C1 = Prod1 U.S. limited to US production (C2 ≠ P2) Prod2 U.S. US & Japan specialize based on comparative advantage 0 Soybeans (tons) US exports beans: C < Prod US imports planes: C > Prod Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  Without trade consumption equals production In an economy that does P not trade, domestic production is the only source for consumption S A Domestic P determines production $3000 Domestic price Domestic P determines D consumption Domestic production D costs limit consumption Q 180 Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 28  World Price and Comparative Advantage Comparative advantage = lowest opportunity cost Domestic and World Price = Opportunity cost Comparing PD to PW reveals comparative advantage Compare Domestic price to World price If PD < PW: Domestic country has comparative advantage— Exports the good If PD > PW: Domestic country does not have comparative advantage—Imports the good Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 29 With trade, consumption & production can differ Opening an economy to trade P Trade increases produces winners and losers total domestic CS by World P determines C1 + C 2 S production & consumption A World production costs limit consumption $3000 Domestic price PS transferred to CS B C1 C2 New CS created $2500 World price D The gains to winners are D LARGER than the losses to 150 180 200 Q losers Imports Kermit Daniel. Econ 1012 Macroeconomics. Spring 2025 30 Real-world example: Romania When Romania opened itself to international trade, the price of chocolate in Romania declined A. Does Romania have comparative advantage in the production of chocolate? B. Is Romania an exporter or an importer of chocolate? C. Romanian consumers will be better off or worse off? How about the producers? D. Are there any gains from international trade? Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 The Effects of a Tariff Tariff Tax on goods produced abroad and sold domestically Tax on imported goods Free trade Domestic price, PD = World price, PW Tariff on imports Raises price above world price By the amount of the tariff (small economy) Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 Tariff transfers CS to PS and creates a DWL Imposing a tariff produces P winners and losers Deadweight Raises revenue (F) loss = E + G S Increases PS (D grows) A Reduces CS (B & C shrink) $3000 Domestic price B C Creates inefficiency (DWL $2800 After tariff E F G = E + G) $2500 D World price The gains to winners are D SMALLER than the losses 150 162 182 200 Q to losers Imports Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33 International Trade – Other benefits Other benefits of international trade Increases variety of goods Lower costs through economies of scale Increased competition Increased productivity as resources move from the least to the most productive industries Enhanced flow of ideas—Facilitates the spread of technology Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 International Trade – Arguments against Arguments against free trade Destroys domestic jobs Must compete on a “level playing field” “Infant industries” need protection Industry X is critical to national security Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 Argument: Free trade costs jobs “Trade with other countries destroys domestic jobs” True, but: Free trade creates new jobs even as it destroys some old ones Total unemployment does not rise as imports rise, because job losses from imports are offset by job gains in export industries Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36 Argument: Must have a “level playing field” “Free trade is desirable only if all countries play by the same rules” Sounds reasonable, but it is not right. For example, importing from a country that subsidizes production: Increases total surplus for importing country Low-cost products subsidized by the other country’s taxpayers The gains to importing country’s consumers will exceed the losses to producers Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37 Argument: “Infant industries” need protection “New industries need temporary trade restriction to help them get started” Older industries need temporary protection to help them adjust to new conditions” Difficult to implement in practice The “temporary” policy is hard to remove Protection from competition is not necessary for an infant industry to grow and may even impede growth Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 Argument: Industry X is critical to national security “The industry is vital to national security” Must evaluate which companies or industries raise legitimate concerns over national security Companies have a financial incentive to exaggerate their role enhancing security—Protection from foreign competition is in their interest Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 Summary The effects of free trade can be determined by comparing the domestic price before trade with the world price A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer. Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 Summary When a country allows trade If it becomes an exporter: producers of the good are better off, and consumers of the good are worse off If it becomes an importer: consumers are better off, and producers are worse off The gains from trade exceed the losses A tariff reduces the gains from trade Domestic producers are better-off, and the government raises revenue, but the losses to consumers exceed these gains Mankiw, Principles of Macroeconomics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 End 42