Econ 201 Ch. 6-10 - Supply, Demand & Welfare Economics (PDF)

 Chapter 6 Supply, Demand and Government Policies In Chapter 4, we discussed the equilibrium price and quantity In a competitive market, free of government regulation, at the equilibrium price, the quantity buyers want to buy equals the quantity sellers want to se...

 Chapter 6 Supply, Demand and Government Policies In Chapter 4, we discussed the equilibrium price and quantity In a competitive market, free of government regulation, at the equilibrium price, the quantity buyers want to buy equals the quantity sellers want to sell Some people might not be happy with this free-market process Producer groups lobby for higher prices Consumer groups lobby for lower prices Price Ceiling (legal maximum price ex. government says rent for two- bedroom can't go in binding price apartment Binding price control markets , Not a Pr ceiling s ex. rent Pr ceiling above $3000 but current CQP-Q'l medication pl equilibrium price is $2000. shortages S so no shortage ! · pr = - - - - - i ar a Price Floor minimumpre a gal binding non-binding ex diamonds pr S. dairy , minimum , wage pr ------- pf ! Carbon Tax a - Our elementary understanding of taxation using our supply and demand model allows us to analyze carbon taxes This will be a brief introduction to the topic, with more in-depth analysis later in the course when we have built our model even further Carbon taxes are often implemented by governments to combat negative externalities caused by the consumption of carbon and carbon-related products found in fossil fuels we’ll learn more about externalities later They do this by taxing the consumption, use, and/or production of carbon. Most frequently, it is a tax on carbon emissions There are many aspects of our demand/supply model that may be applied to the analysis of carbon taxes Carbon taxes using an Econ 201 lens What concepts that we’ve covered in class apply to the analysis of carbon taxes? Incentives/marginal cost/marginal benefit Efficiency/equity Elasticity Taxes, tax incidence, and tax revenue Others...?  Carbon tax: incentives What does a carbon tax do to the incentives consumers/firms face? Governments have identified harms that may result from the use/emission of carbon An increased marginal cost seeks to incentivize consumers/firms to use, and ideally emit, less carbon Do we think this is an effective way to modify incentives? Carbon tax: efficiency/equity How might carbon taxes promote efficiency? Equity? We don’t quite know the mechanisms yet, but carbon taxes can promote efficiency if they properly internalize externalities How might taxing carbon promote equity? Are these done well in practice? Carbon tax: elasticity We’ve learned that the demand-elasticity of a good depends on how substitutable it is And how easily it can be substituted may depend on the time horizon Similarly, supply-elasticity may depend on time horizons as well, as firms may need time to adjust away from certain inputs towards others When carbon is taxed, it has implications for both demand and supply, but this depends on time horizon Bringing it all together P Isnort run market for carbon (long-run) n P1 Market for Carbon - S e Tax revenue Tax revenue : S (short-run) = (pq ps)x@ - llongrua * Taxrevenuein the shora run > revenue in the long at O Chapter 7 Welfare Economics Chapter 7 will deal with the welfare or surplus to buyers and sellers This is the benefit that buyers and sellers receive from participating in the market We’ll look at consumer surplus ↳ The benefit to buyers We’ll look at producer surplus ↳ The benefit to sellers We’ll look at efficiency ↳ Is the market maximizing the total benefits that can be realized in the economy? Consumer surplus Willingness to Pay (or WTP) is the maximum amount of money that a consumer would be willing to pay for a good ↳ i.e., this is how much they value the good The benefits a consumer receives when buying a good depends on the price that consumer paid, and how much they valued the good This varies between individual consumers – therefore depends on who receives the good! Consumer surplus example Suppose Johnny wants to sell a Flames jersey to one of his friends, so he hosts an auction amongst his friends They each value that Flames jersey differently AJ has a WTP of $60 Kevin has a WTP of $50 Howie has a WTP of $40 Nick has a WTP of $20 The bids would quickly rise to $50 (or rather, marginally more) Bonus Q: why is this? pays inframarginal - gain MY marginal gain inframarginal i marginal Consumer surplus quantifies the benefits to buyers Measures the benefits that buyers receive as they themselves perceive it (firms can influence your wip try to Good measure of economic well-being of consumers, to the extent policymakers want to respect the preferences of buyers ↳ In other words, consumers are the best judges of how much they benefit from receiving goods Some possible exceptions to this: ↳ The WTP may not truly reflect how much enjoyment/value buyers actually feel/get from consumer the good ↳ Lack of self-control Producer surplus Willingness to sell (WTS) is the minimum amount of money that a seller would be willing to accept to sell a good Production cost: the value of everything a seller must give up to produce a good If some firms can produce a good at different costs, the size of benefits from seller to seller depend on who produces and sells the good! ↳ ex · big places like Walmart have lower Wis because they have lower production costs Producer surplus example Suppose I want to hire someone to install a new roof on my house As the buyer, I want to pay the lowest possible price (assuming all goods are identical) Therefore, I auction off the contract for the job Four firms identify themselves as willing to do the job. However, it costs them each different amounts to do so! & pro al · Market efficiency Consumers prefer lower prices...... but producers prefer higher prices What is the “correct” price? What price maximizes the benefits for everyone? - Is the allocation of resources determined by free markets the most desirable? ↳ equilibrium ? Total surplus To answer these questions, we look to the concept of total surplus Total surplus = Consumer surplus + Producer surplus WTP WTS Total surplus = Value to buyers – Cost to sellers The vertical distance between the demand and supply curves! An efficient allocation is one that maximizes total surplus For now, we ignore the concept of equity, which may indeed play a role in how resources are allocated! Market Equilibrium CS PS Could we force the prince higher? This leaves several consumers unwilling to purchase the good, even though producers are willing to sell it Producer surplus increases, but not enough to cover the consumer surplus that was lost P1 * can't force the price higher ! Deadweight a t > Could we force the price lower? P1 Consumers are now willing to buy the good, but there are producers that are now unwilling to sell at such a low price! Dur S m Consumer surplus increases, but we still lose total surplus This loss is called deadweight loss The market equilibrium as the efficient quantity Efficiency In a market equilibrium, goods are allocated to buyers who value them the most, and are produced by firms who can produce them at the lowest cost All possible sales in which the buyer values the good more than the seller are realized None of the possible sales in which the buyer values the good less than the seller are realized It’s important to note... Market are efficient as long as some assumptions hold true ↳ Perfect competition (no buyer or seller is big enough to control the market, i.e., no market power) ↳ Only the private value to the buyer and the private costs to the seller matter. That is to say, no third-party is affected by the sale of the good. No externalities! These are examples of market failures > - So, what does this mean? An optimistic interpretation: It is remarkable that, under some assumptions, free markets are always efficient A pessimistic interpretation: It is remarkable that free markets only turn out to be efficient under certain assumptions! Final thoughts on efficiency vs. equity What role does fairness play? Theory indicates that a higher willingness to pay leads to a higher demand Higher demand leads to higher price This adjustment process is efficient But is it fair? such as : G Should shovels be more expensive after a snowstorm? G Should Uber practice surge pricing? G Your role as a policy advisor is to help governments determine this Surplus Example: ad > - 1202 = P demand functionRoad Os ↑P solve for equilibrina = S supply function Op = Os · 120 20 4p - = 120 = GP Find PS C S : + x80 1600 #. x 40 = Find P S = 20 : 80 x. x 20 800 & = D 4p Find T S :. 1600 + 800 = 2400 = 1203 ↓ a 80 a what New happens at p = 22 ? C S : zx 76 x :20-22 38. 1444 Q = New P S:. = 9 so Chapter 8 Applying efficiency to taxation policy How do taxes affect economic well-being? We now have the tools to compare the amount of consumer and producer surplus with and without taxes We know from previous chapters: When taxes are introduced, it drives a wedge between supply and demand effects of tax on efficiency Price consumers pay rises Pl Tax x Qt Price firms receive falls S · The burden of the tax is shared, but not always evenly Deadweight loss is the reduction in total surplus due to tax Effect of a tax on price and quantity & Total Surplus (no tax) > Total surplus (tax) Tax Revenue The impact of tax on welfare P1 · O The impact of tax on welfare - Size of DWL The DWL is due to oppritunity for gains from trade that are not realized inelastic supply elastic supply Pr Dw's Pr increases with * DWL elasticity ! d PB DriL a" [ S P -- ----fDw - D > · " P Tax of same size yields larger DWL when supply is more elastic Same is true for demand! More elastic -> larger DWL General principle: the more a tax distorts behaviour (the higher the elasticity, or responsiveness), the larger the DWL Pr Pr As tax T · increases , S Dut also increases -----d Dun soons > · reven - - - D > a D - DWL increases with the size of the tax Tax revenue does not necessarily increase with the size of the tax! DWL and the size of tax Doubling the tax rate more than doubles the DWL, because the DWL increases with the square of the size of the tax Tax revenue and the size of the tax Doubling the tax rate may or may not increase tax revenue Tax revenue is maximized when the tax is at 𝑡∗ The Laffer Curve Consider the income tax (e.g., a tax on labour) If the current tax rate is above 𝑡∗, then decreasing the tax rate may actually increase revenue! In practice, the question then is: What is the value of 𝑡∗? Answer: it depends on the elasticities! The smaller the labour supply elasticity, the larger is 𝑡∗ If labour supply is perfectly inelastic, then the DWL is zero, and 𝑡∗ = 100% Size of the DWL: Income Taxes (Labour) Multiple ways workers could adjust their labour supply Change number of hours worked (overtime) Whether both spouses work or only one does Retirement age Other ways workers could adjust the income they report Tax evasion (underground economy) Tax avoidance (loopholes, personal vs. corporate income, etc.) Income shifting (e.g., across provinces) What does the data say? Estimates of labour supply elasticities vary across income levels and demographics On average, most estimates fall between 0.1 and 0.4 (Saez, Slemrod, Giertz; 2012) Taking a value roughly in the middle, the “optimal” tax rate that maximizes revenue is... Debates are often about the TOP marginal tax rate, which only affects TOP income earners (e.g., the top 1%) The elasticity of reported income for TOP earners tend to be larger than for workers with lower income In Canada, Milligan and Smart (2015) find that the elasticity for the top 1% is about 0.7, which suggests an optimal rate of 44.4% This estimate is somewhat of an outlier, however. Across countries and time periods, most estimates of the optimal rate fall between 50% 80% (Diamond and Saez; 2011) Chapter 9 In Chapter 9 we re-address international trade A concept that we’ve covered in earlier chapters, but we now have more tools at our disposal! We’ll look at the determinants of international trade Examine potential “winners” and “losers” of international trade Learn that the gains to “winners” from international trade exceed losses to “losers” Analyze welfare implications of government policies such as tariff and import quotas Examine the argument for trade restrictions An economy without international trade An economy without international trade has markets where prices adjust to the equilibrium point, where quantity demanded equals quantity supplied However, in international markets, we consider a world price A world price is the price of a good that prevails in the world market for that good Introducing trade When trade is permitted: If the world price for a good is higher than the domestic price, then the country will export that good If the world price of that good is lower than the domestic price, then the country will import that good Recall from Chapter 3: Comparing domestic and world prices reveals whether a country has a comparative advantage in producing a certain good! If the domestic price is low, the cost of producing that good domestically is low, suggesting a comparative advantage over the rest of the world! This means...? The “domestic” country here will produce the good and export it to the rest of the world! from and losses from gains and losses gains exporting importing are better Buyers · a off at the lower gas · sellers are better off at world price the world price wo rs e sellers are · is off ! Buyersareworse · f Es Tops · la "transfer" of B (a "Transfer" of B) againincreased · · Trade increased total economic economic well being total once wellbeing! again  Importers: key takeaways When a country allows trade and becomes an importer of a good, domestic consumers are better off while domestic producers are worse off Trade raises economic wellbeing of a nation – gains from trade for the winners exceeds the losses of the losers! ↑ (export is Opposite) Introducing government policy Suppose a country wants to gain tax revenue from their trade with the rest of the world – particularly, their practice of importing They can introduce tariffs or quotas Tariffs are a tax on goods produced abroad and sold domestically A quota is a limit on how much of a good that can be imported Introducing government policy: tariff 1 P Domestic supply A tariff · reduces the quantity win of imports and moves market closer to the that would a equilibrium ex ist without trade on Total falls by · surplus the area D + F(DWL Demand Pin Domestic > our not s a a O Import quotas Quotas are another way that nations may restrict international trade Import quotas limit how much of a good an be imported They work much like tariffs. Both: Reduce quantity of imports Raise domestic prices of goods Decrease welfare of domestic consumers Increase welfare of domestic producers Create deadweight loss The main difference: Tariffs raise revenue for a government Quotas create surplus for those who obtain licenses to import The profit for a holder of an import license is the difference between the domestic price and world price Tariffs and quotas: takeaways As with all government policies, there are likely trade-offs between equity and efficiency Governments need to weigh the marginal benefit and marginal costs of introducing tariffs or quotas Citizens may be willing to accept higher prices and deadweight loss if it means protecting domestic industry The optimal tariff should reflect the trade-offs and be set such that the marginal benefit of increasing the tariff equals the marginal cost This involves a value judgement! Other benefits of international trade There are several other economic benefits to international trade Increased variety of goods Lower costs through economies of scale Increased competition Enhanced flow of ideas Increased variety of goods There are some goods which are produced in certain countries and not others Textbook example: German and Canadian beer Trade gives consumers the access to goods in other countries – greater variety! What are the implications? More selection is great... But what about elasticity? More substitutes makes goods more elastic More elastic goods lowers potential tax burdens What does this mean for welfare? Tax revenue? Lower costs through economies of scale Some goods can be produced at lower costs because they are produced in larger quantities. This phenomenon is called economies of scale Larger firms are able to take advantage of specialization of labour Average costs are lowered (proportionately) when quantity increases (more in Chapter 14) When firms increase their quantity sold (sell to the world market and not just the domestic market), they may take advantage of more efficient production Welfare implications? What happens when costs decrease? Increased competition A company who does not have foreign competitors is likely to have market power Market power is a source of market failure! Prices are raised above competitive levels Trade fosters more competition Enhanced flow of ideas Goods are not the only things that are exchanged when trade happens Technologies, ideas, etc. are also potentially passed from country to country Is the same true for culture? Are all ideas good to export? Is this inherently good? Fun topic: surge pricing What is surge pricing? With the widespread adoption (by both consumers and firms) of digital technologies......firms can now update prices in real-time This has been widely utilized since around 2010 When firms use data to determine demand and increase price of goods and services within specific timeframes, it is practicing surge pricing. Commonly seen in ridesharing apps like Uber or Lyft, delivery apps like DoorDash, SkipTheDishes, etc. However, some other firms are experimenting with this practice Some firms may have been practicing surge pricing for decades now Any ideas which firms/industries? ↳ airlines , ticket offices hotels , ex. gasoline , , sport/concert tickets Surge pricing in our 201 model Which concepts from our Econ 201 model apply to the analysis of surge pricing? Willingness to pay Supply/demand Equilibrium price Comparative statics Efficiency/equity Elasticity Any others? Modelling surge pricing Why might a company increase the price of their goods and services during a certain time period? Demand may have increased Demand may have become more inelastic Or both Surge pricing: Increased demand Pr · demand shifts outwards preak an "GP O Surge Pricing: demand becomes more inelastic Pr S Whena good ismore nelastic increase revenue.. e Modelling surge pricing O Surge pricing: efficiency and equity Is surge pricing efficient? It depends If it increases total surplus, then surge pricing is efficient Are we properly pricing how everyone values their time? Chen & Sheldon (2015) find that surge pricing significantly increases driver supply Is it equitable? In other words, is it fair? Who does it benefit? Who does it harm? Should it be allowed? Extreme examples: Ambulance rides/medical care during natural disasters Necessities during a pandemic  Surge Pricing: welfare effects Surge Pricing: elasticity Recall: A good is inelastic if there is a proportionally smaller change in quantity in response to a change in price Inelastic goods are goods that are not easily substituted away from Is it all good? These are all benefits of international trade Can we think of any reasons that it would be disadvantageous? No right answer... lots of conversation to be had Arguments against international trade I The Jobs Argument 2 The National Security Argument 3 The Infant Industry Argument 4 The Unfair Competition Argument. 5 The Protection as a Bargaining Chip Argument The Jobs Argument Opponents of free trade argue that trade with other countries destroys domestic jobs However, free trade creates jobs at the same time that it destroys them Recall that gains from trade are based on comparative advantage ↳ Even if one country is better than another at producing everything (absolute advantage), each country can gain from trading with the other Workers in each country will eventually find jobs in industries in which the country has comparative advantages However, this transition takes time and is not without hardship The National Security Argument There may be legitimate national security concerns over the lack of protection of certain industries ↳ Example: steel which is made to create guns or tanks. If war breaks out, you do not want to be dependent on foreign suppliers However, it is important to be vigilant of how this argument is being made Is it being made by producers looking to capture consumer surplus? 2018 Trump administration imposing tariffs on steel and aluminum Largely recognized (and condemned) as being motivated by little to do with national security (or sound economic theory whatsoever...) Companies have incentives to exaggerate their role in national defence in order to obtain protection from foreign competition These arguments can be compelling! “National pride?” n u The Infant Industry Argument New industries argue for temporary protection to help them get started - The argument is that after industry matures, firms will be able to compete on foreign market Similarly, older industries argue they need protection to adjust to new conditions. Sir John A. Macdonald’s “National Policy” in 1878 Attempt to protect infant Canadian manufacturing sector Lasted for 110 years until Canada-U.S. Free Trade agreement 1989 Infant industry argument is difficult to implement in practice It involved “picking winners”, especially with the political process (and politically powerful industries) The Unfair Competition Argument Some argue that free trade only works if all countries “play by the same rules” Firms in different countries may be subject to different laws and regulations ↳ The argument is that it is unfair to expect all firms to compete under those conditions Perhaps a foreign country has subsidized production Lower costs, lower prices Domestic firms would argue against being forced to compete against in the world market Same argument as before – low costs to domestic consumers outweighs losses to domestic producers The Protection as a Bargaining Chip Argument Last argument concerns strategy Many policymakers claim to support free trade but want trade restrictions when they can be used to bargain with trading partners Threats of trade restrictions can be used to gain international political favours Same with promises of removing trade restrictions (or preferential trading treatment) Truth is, threats don’t always work Often end up hurting domestic consumers and doing damage to international reputation Chapter 13 The Costs of Production We understand how the supply curve shows firms’ willingness to sell But how do we derive a supply curve? We’ll be holding up a lens to the supply side of the economy We’ll learn about the costs that go into the production of a firm We’ll learn about the different types of cost, and how they vary in the short- and long-run Contextualizing costs The objective of any firm is to maximize profits 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 We know that 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑃 × 𝑄 The price that a firm gets for a unit sold, multiplied by the quantity What about total cost? How economists measure costs Economists measure total cost by using the sum of a firm’s explicit costs and implicit costs Explicit costs are costs that require firms to pay money Implicit costs are derived from costs that do not require the firm to pay money The value of the next best alternative given up to produce a good Economic profit is total revenue minus both implicit and explicit costs Why do economists do this? Economists are interested in firm behaviour (production, pricing, etc.) Firms making positive economic profit will stay in business Production and Costs As economists, we’re interested in how firms make decisions Consumers make decisions by maximizing their happiness – or utility Econ 301 Firms make decisions by maximizing their profit How do we know whether a firm is maximizing profit? We need to understand the costs of a firm The Production Function The production function demonstrates the relationship between quantity of inputs (which are used to make a good) and the quantity of output (the good itself) Prod A production function is a function function G A function is a mathematical relationship involving variables. inputs goods/ Services > ↳ The production function describes the relationship between our inputs and our outputs - The Production Function – An Example Let’s look at an example from the text Suppose a firm wants to produce cookies Suppose that the size of the factory is fixed, and that the only way to produce more cookies is by changing the number of employees This assumption holds for the short run but not the long run This table describes the costs and productivity associated with each unit of labour hired Important new terms: Marginal product of labour is the increase in output that results from an additional unit of input Diminishing marginal product describes how marginal product of an input declines as the quantity of the input increases Total-cost curve - An example To 30- > output Different types of costs We can take our analysis of costs even further Total costs are made up of several different types of costs Fixed costs are costs that do not vary with the quantity produced Costs related to keeping the lights on, renting a building, etc. Variable costs vary with the quantity if output produced Costs associated with inputs We typically look at these two costs as averages, and divide them by 𝑄 Marginal cost is the increase in total cost that comes from an extra unit of production 𝑀𝐶 = ∆𝑇𝐶/∆𝑄 X change in = Cost curves – another example Consider now a coffee shop with the following measures of cost: Adding average fixed cost Average fixed costs are the fixed costs divided by the quantity produced! - 𝐴𝐹𝐶 = 𝐹𝐶/𝑄 Adding average variable cost Average variable costs are variable costs divided by the quantity produced 𝐴𝑉𝐶 = 𝑉𝐶/𝑄 Adding average total cost Average total cost is total cost divided by quantity produced 𝐴𝑇𝐶 = 𝑇𝐶/𝑄 Finally, marginal cost Marginal cost is the increase in total cost that arises from one more unit of output - - - 𝑀𝐶 = ∆𝑇𝐶/∆𝑄  Graphing these cost curves * Marginal cost crosses M( total average costs ($) cost (ATC) at the ATC minimum value of average total AVC cost (ATC) $1. 30 --------... AFC 3 Quantity Cost curves – key takeaways 1. 1. Marginal cost eventually rises with the quantity of output 2. 2. The average-total-cost-curve is U-shaped 3. 3. The marginal-cost curve crosses the average-total-cost-curve at the minimum of average total cost Costs in the short- and long-run Firms’ costs depend heavily on the time horizon In the short-run, not all inputs are variable ↳ Usually, capital is fixed and labour is variable In the long-run, all inputs are variable ↳ Firms can buy more factories, more machines, or more land Different types of costs D ! important Chapter 14 Firms in competitive markets For the first time in a long time, we’re going to venture ever-so- slightly away from the supply- demand model We’re going to take a deep dive into the decision making process of an individual firm From there, we’ll look at aggregate behaviour These are the building blocks for future topics such as antitrust economics, regulatory economics and game theory This topic can be tricky! Take your time, ask questions, and review your material What is a competitive market? This is a concept we’ve looked at before A competitive market (in our case, a perfectly competitive market): There are many buyers and many sellers Each buyer and seller has negligible (if any) impact on the market price The goods offered by each seller are identical Firms and consumers are price takers -po Now, we introduce a third market condition Free exit and entry into the market Behaviour of firms: total revenue A firm tries to maximize profit ↳ A fundamental assumption that holds true in the real world (except for extremely rare examples) Profit is total revenue minus total cost 𝜋 = 𝑇𝑅 − 𝑇𝐶 IR = PxQ priceguanteariable cost) Revenue explained Let’s say I decide to start growing blueberries Fun fact: I worked as a farm hand on a blueberry farm in the summer of 2017 I produce quantity 𝑄 of blueberries and sell each unit at the market price 𝑃 If I sell 200 buckets of blueberries for $4 per bucket, my total revenue is $800 I take the price as given, because I am a small firm in a competitive market Average revenue is the total revenue divided by quantity sold Marginal revenue is the change in total revenue that resulted from an additional unit sold In our example, each of these is $4 and remains so throughout  Back to our revenue example Recall my blueberry farm M = TR - TC > - My goal is to maximize profit, which is total revenue minus total costs We know about revenue and costs We are now able to examine how I would make my profit maximizing decision For the example, let’s assume my fixed costs are $2. My variable costs depend on the output produced This example provides us with a great illustration of profit maximization My profit is maximized when my marginal costs are equal to marginal revenue, at 3 or4 buckets of blueberries! Another way to view these findings: as long as marginal revenue exceeds marginal costs, increasing the quantity produced raises profits! Profit maximization for a competitive firm costs revenue MC # TR-TC = MR a- P = ↑max when MC = MR AVC - Takeaways: This probably seems like a lot I encourage you to work through these examples on your own * ↳ If nothing else, there are three critical things (0) to take away from the study of the optimal decision of the firm ↳ First, if 𝑀𝑅 > 𝑀𝐶 then the firm should increase output (a) ↳ Secondly, if 𝑀𝑅 < 𝑀𝐶 then the firm should decrease output Lastly, at the profit-maximizing output, 𝑀𝑅 = 𝑀𝐶 Fun topic: tariffs Luckily, we already know what a tariff is A tariff is a tax on an imported good We know a tariff: Increases the price of the good Creates deadweight loss Typical arguments for and against international trade? Tariffs? International Trade Crash Course Exports are goods and services produced domestically and sold abroad......and imports are goods and services produced abroad but sold domestically Net exports is the value of a nation’s exports minus the value of the nation’s imports This is also referred to as the trade balance Trade Deficits and Surpluses If net exports are positive, this means that exports are greater than imports When this happens, we refer to it as a trade surplus Conversely, net exports are negative when a country imports more than it exports In this case, the country is running a trade deficit Balanced trade happens when exports are equal to imports Should a country strive for balanced trade? Should it strive for a trade surplus? Neither? Do you think Canada has a trade surplus, or a trade deficit? Is it in balanced trade? Canada’s Trade Situation – September 2024 Canada’s trade partners Trade Between U.S. and Canada Canada and the U.S. have a rich history of trade As we’ve seen, the two countries rely heavily on one another for goods and services In 1989, Canada and U.S. signed the Canada-U.S. Free Trade Agreement Objective: reduce tariffs on a large scale Previously, focus of tariff-reduction was limited to automobile industry 1994 – North American Free Trade agreement (NAFTA) was signed This resulted in a large spike in trade between the two countries 2017 – Trump administration declared NAFTA was inadequate September 2018 – United States-Mexico-Canada Agreement (USMCA) was agreed upon USMCA was ratified by March 2020 and signed by April 2020 Replaced NAFTA on July 1, 2020 Only minor changes Environmental regulations, working regulations, U.S. auto. production incentives, digital trade regulations, etc. Trade Between U.S. and Canada – Tariffs on Steel and Aluminum You learned early in this course, as well as in 201, that free trade is mutually beneficial Agreements that lower tariffs and reduced trade barriers tend to lower prices and increase GDP Through gains-from-trade, comparative advantage, etc. In 2018, the U.S. government announced a wide range of tariffs on Canadian steel and aluminum This was nearly universally condemned by economists worldwide "America First"