PEco Module 7

• International Trade is an exchange involving a good or service conducted between at least two different countries.
• Import means buying or acquiring goods from outside the country.
• Export means selling and shipping of produced goods of a country to another country.
• The equilibrium without trade occurs when an economy cannot trade in world markets, the price adjusts to balance domestic supply and demand.
• Consumer and producer surplus in an equilibrium without international trade for the textile market in the imaginary country of Isoland are shown in this figure.
• The first issue our economists take up is whether Isoland is likely to become a textile importer or a textile exporter.
• World Price is the price of a good that prevails in the world market for that good.
• The North American Free Trade Agreement (NAFTA) lowered the trade barriers among USA, Canada, and Mexico in 1993.
• Trade Agreements are unilateral when a country removes its trade restrictions on its own.
• GATT has successfully reduced the average tariff among member countries from about 40% after World War II to about 5% today.
• The General Agreement on Tariffs and Trade (GATT) is a continuing series of negotiations among many of the world’s countries with the goal of promoting free trade.
• The rules established under GATT are now enforced by an international institution called the World Trade Organization (WTO).
• Trade Agreements are multilateral when a country reduces its trade restrictions while other countries do the same.
• Comparative Advantage is the ability of an individual or an economy to produce a good at a lower opportunity cost than its competitors.
• Autarka is a country that does not allow international trade.
• In Autarka, a wool suit costs 3 ounces of gold.
• In neighboring countries, a wool suit costs 2 ounces of gold.
• If Autarka were to allow free trade, it would import or export wool suits.
• The welfare effects of free trade are analyzed by assuming that Isoland is a small economy compared to the rest of the world.
• Gains and Losses of an Exporting Country are shown in this figure.
• Sellers benefit because producer surplus increases by the area B + D.
• Buyers are worse off because consumer surplus decreases by the area B.
• A common argument is that free trade is desirable only if all countries play by the same rules.
• They claim that the threat of a trade restriction can help remove a trade restriction already imposed by a foreign government.
• If firms in different countries are subject to different laws and regulations, then it is unfair (the argument goes) to expect the firms to compete in the international marketplace.
• Free trade allows firms to realize economies of scale more fully.
• New industries sometimes argue for temporary trade restrictions to help them get started.
• Many policymakers claim to support free trade but, at the same time, argue that trade restrictions can be useful when we bargain with our trading partners.
• Opponents of free trade often argue that trade with other countries destroys domestic jobs.
• Older industries sometimes argue that they need temporary protection to help them adjust to new conditions.
• An import quota is a limit on the quantity of imports.
• The transfer of technological advances around the world is often thought to be linked to the trading of the goods that embody those advances.
• Opening trade fosters competition and gives the invisible hand a better chance to work its magic.
• License holders are better off because they make a profit from buying at the world price and selling at the higher domestic price.
• Workers in each country will eventually find jobs in an industry in which that country has a comparative advantage.
• Free trade creates jobs at the same time that it destroys them.
• Free trade gives consumers in all countries greater variety to choose from.
• When an industry is threatened with competition from other countries, opponents of free trade often argue that the industry is vital to national security.
• After a period of protection, the argument goes, these industries will mature and be able to compete with foreign firms.
• Because the quota raises the domestic price above the world price, the domestic buyers of the good are worse off, and domestic sellers of the good are better off.