Introductory Macroeconomics Lecture 17: International Trade I PDF

Introductory Macroeconomics Lecture 17: International Trade I Jonathan Thong Daniel Minutillo 2nd Semester 2024 1  This Lecture International Trade I – direction of trade - ’small open economy’ model – winner...

Introductory Macroeconomics Lecture 17: International Trade I Jonathan Thong Daniel Minutillo 2nd Semester 2024 1  This Lecture International Trade I – direction of trade - ’small open economy’ model – winners and losers from trade – effect of protection policies: tariffs BOFAH Chapter 16 2 Australian Exports 3 Australian Imports 4  Key Questions in International Trade Why do countries trade with each other? What do countries trade with each other? – what determines a country’s exports? and imports? Who are the winners and losers from international trade? What are the effects of trade policies? 5  Gains from Trade Trade is like a new technology Allows scares resources to be allocated in more efficient ways In aggregate, countries gain from trade but – gains need not be shared equally between countries – winners and losers within each country (jobs lost in some industries, jobs created in others) Trade policy affects the distribution of the gains from trade, both within and between countries 6  Direction of Trade Small Open Economy Model 7  Small Open Economy Model Consider country like Australia, small relative to rest of world Can use simple ’partial equilibrium’ supply and demand analysis Focus on one market, say computers – let p be the price of computers – let pA be the autarky prices of computers in Australia – let pW be the world price of computers, taken as given, and suppose pW < pA Then Australia will import computers 8 Autarky (No Trade) 9  Importing Computers At world price pW < pA there is excess demand for computers. Imports given by the difference between domestic demand qD and domestic supply qS at world price. 10  Small Open Economy Model Now consider another market, say minerals – now let p be the price of minerals – let pA be the autarky prices of minerals in Australia – let pW be the world price of minerals, taken as given, and suppose pW > pA Then Australia will export minerals 11  Exporting Minerals At world price pW > pA there is excess supply for minerals. Exports given by the difference between domestic supply qS and domestic demand qD at world price. 12  Direction of Trade More generally: Countries will import goods whose world price is lower than its autarky price in their economy (Australia imports computers) Countries will export goods whose world price is higher than its autarky price in their economy (Australia exports minerals) Autarky price determined by underlying technologies, capital, labour, natural resources etc. 13 Winners and Losers from Trade 14  Trade Policy Trade acts like a change in technology New technologies ⇒ can produce more with scare resources But burden of adjustment is not borne evenly There are ’winner’ and ’losers’ from changes in trade policy (The same is pretty much true of most changes in economic policy) 15  Winners and Losers from Trade Who is affect in the domestic economy? – consumers – firms and workers in the computer industry – firms and workers in the minerals industry Import competition contracts domestic computer production Export opportunities expand domestic mining production Focus on domestic outcomes because ’small open economy’ ⇒ no significant effect on foreign consumers or producers. 16  Winners Domestic consumers of computers – pay lower prices – consume more Domestic producers (firms and workers) in mining industry – receive higher prices – produce more 17  Losers Domestic consumers (users?) of minerals – pay higher prices – consume less Domestic producers (firms and workers) in computer industry – receive lower prices – produce less What is the net effect? 18  Welfare Need a measure of welfare for producers and consumers Consumer surplus: total difference between (i) the price a consumer pays, and (ii) the maximum price consumer willing to pay added up over all consumers Producer surplus: total difference between (i) the price a producer receives, and (ii) the minimum price producer willing to operate at added up over all producers Economic surplus is consumer surplus + producer surplus 19  Economic Surplus in Autarky (No Trade) Consumer surplus (area abc) from buying qA units at price pA and producer surplus (area bcd) from selling qA units at price pA. 20  Change in Surplus from Trade in Computers Consumer surplus increases by area cc′ bb′. Producer surplus decreases by area cc′ be. Economic surplus increases by area ebb′. Consumers gain more than producers lose. 21  Change in Surplus from Trade in Minerals What about in the mineral sector, where Australia exports? In minerals, opening to trade – increases producer surplus and decreases consumer surplus – but increase in producer surplus > decrease in consumer surplus – so again economic surplus increases Try drawing the diagram for yourself! 22  Change in Economic Surplus In general, trade increases total economic surplus But complicated distribution of winners and losers Benefits often diffuse (lower prices for all consumers) while costs often concentrated (job losses) Can lead to calls for protection for industries under threat from foreign competition 23 Effect of Protection Policies : Tariffs 24  Tariff Protection A tariff is a tax on imported goods Consider a tariff that increases the price of imported computers from the world price pW to pT Tariff reduces imports and increases domestic production What are the welfare effects of the tariff? 25  Tariff Protection Tariff increases producer surplus for import-competing industry, decreases consumer surplus including two areas abc and area a′ b′ c′ of deadweight loss. 26  Tariff Protection Increases producer surplus, domestic producers of computers sell more and at higher prices Decrease consumer surplus, domestic consumers of computers buy less and at higher prices Raises tax revenue for the government, area aa′ bb′ , that can be used for other purposes Creates two ’deadweight losses,’ areas abc and a′ b′ c′. Lost consumer surplus that is not redistributed to producers or government. 27  Learning Outcomes 1 Be familiar with broad trends in Australia’s exports and imports. 2 Understand and explain the directions of trade using partial equilibrium analysis. 3 Understand and explain, using welfare analysis, who are the winners and losers from trade, and whether trade is a net benefit in aggregate. 4 Understand and explain how a tariff changes welfare outcomes under trade, and whether tariffs yield a net benefit in aggregate. 28  New Formula(s) and Notation None! 29  Next Lecture International Trade II – production possibilities frontier – absolute vs. comparative advantage – specialization and trade: the Ricardian model BOFAH Chapter 16 30