International Monetary Systems Topic International Trade and Trade

International Monetary Systems Topic: International Trade and Trade Restrictions

Administrative things • Course syllabus, group presentation info, future materials will be posted on: • http: //davemcevoy. weebly. com/imsangers. html • You will indicate which financial crisis your group will present on by editing a Google Doc. The link to the document is: • goo. gl/Xjl 09 g

If these countries were to trade, which would export Radios?

Today’s Agenda • Gains from trade from a market perspective • Arguments for and against free trade • Tariffs (a type of trade restriction) • Balance of Payments Accounts (measuring trade balances)

United States Trade Balance

France Trade Balance

Consider a country Isoland the domestic market for textiles

Domestic Market Equilibrium (no trade) Price of textiles Quantity of textiles

Introducing trade • Isoland is just one small country in the big bad world • The same textiles are also produced in other countries • The textile markets prevailing in other countries we will call the “world market” • The world supply and demand determine the “world price” – the price is in Isoland dollars • A comparison of the domestic price with the world price will indicate whether Isoland will import or export textiles.

Isoland World Textile Markets P P Q Isoland’s Textile Market Q World Textile Market

Welfare measures after trade • Which actors in the Isoland market are better off? Which are worse off? What about total welfare (surplus)?

Isoland World Textile Markets (low world price) P P Q Isoland’s Textile Market Q World Textile Market

Welfare measures after trade (low world price) • Which actors in the Isoland market are better off? Which are worse off? What about total welfare (surplus)?

Trade Restrictions - Tariffs • When countries become importers of goods we know that consumers are better off but producers are worse off. • Sometimes governments are willing (or are lobbied) to protect domestic producers by imposing tariffs – a tax on imported goods • The tariff raises the price of the good relative to world price (which is also the domestic price without trade restrictions)

Welfare measures with tariffs (tax on imports)

Group Work: Trade and trade restrictions Ecoland is a small country that produces and consumes jelly beans. The world price of jelly beans (outside of Ecoland) is € 1 per bag. Ecoland’s domestic demand supply functions for jelly beans are: QD = 8 – P QS = P where P and Q are prices in euros and quantity in bags.

QD = 8 – P QS = P PW = € 1 per bag Answer the following (drawing graphs will help!!): (1) No trade: Calculate the equilibrium price (the domestic price), quantity, consumer surplus, producer surplus and total surplus. (2) Free Trade: Calculate the equilibrium price (the domestic price) quantity produced domestically, quantity consumed domestically, imports, consumer surplus, producer surplus and total surplus (3) Trade with Tariff: Suppose a € 1 tariff is imposed for all inputs. Calculate equilibrium price (domestic price), quantity produced domestically, quantity consumed domestically, imports, consumer surplus, producer surplus, government revenue and total surplus. (4) What are the gains from free trade in Euros? What is the deadweight loss from the trade restriction?