International-Trade

CHAPTER1INTERNATIONALECONOMICISDIFFERENTFourControversiesImportsofAutomobileTiresImmigrationChina’sExchangeRate•“CrawlingPeg”inwhichthegovernmentallowssmalldailychangesthatresultinaslow,tightlycontrolledchangeovertimeintheexchange-ratevalue.GlobalFinancialandEconomicsCrisisEconomicsandtheNation-StateFactorMobilityDifferentFiscalPoliciesDifferentMoneysInternationaleconomicisexcitingbecausetherearedifferencesbetweencountries,andbecausethesedifferencesareimportantandsometimescontroversial.Whileinternationaleconomicsisdifferent,itisstilllikeothereconomicsinthatwewillbeexaminingthefundamentalchallengeofscarcityofresources---howwecanbestuseourscarceresourcestocreatethemostvalueandthemostbenefits.Westillbeabletodrawonmanystandardtoolsandconceptsofeconomics,suchassupplyanddemandanalysis,andextendtheirusetotheirinternationalarena.PART1THETHEORYOFINTERNATIONALTRADECHAPTER2THEBASICTHEORYUSINGDEMANDANDSUPPLYFourQuestionsAboutTradeWhydocountriestrade?Howdoesthetradeaffectproductionandconsumptionineachcountry?Howdoestradeaffecttheeconomicwell-beingofeachcountry?Howdoestradeaffectthedistributionofeconomicwell-beingorincomeamongvariousgroupwithinthecountry?ALookAhead•Ourbasictheoryoftradesaysthattradeusuallyresultsfromtheinteractionofcompetitivedemand.DemandandSupplyDemand•Whatdetermineshowmuchofaproductisdemanded?Abasicdeterminantofhowmuchaconsumerbuysofaproductistheperson’staste,preference,oropinionsoftheproduct.•Anothermajorinfluenceistheconsumer’sincome.•Wehaveastrongpresumptionthatthedemandcurveslopesdownward.Anincreaseintheproduct’spriceresultsinadecreaseinquantitydemanded.•Howresponsiveisquantitydemandedtoachangeinprice?Onewaytomeasureresponsivenessisbytheslopeofthedemandcurve.Asteepslopeindicateslowresponsivenessofquantitytoachangeinprice(quantitydoesnotchangethatmuch).Aflattercanalsobemisleading.Byalteringtheunitsusedontheaxes,thedemandcurvecanbemadetolookflatorsteep.•Ameasureofresponsivenessthatis“unit-free”iselasticity,thepercentchangeinonevariableresultingfroma1percentchangeinanothervariable.Thepriceelasticityofdemandisthepercentchangeinquantitydemandedresultingfroma1percentincreaseinprice.Quantityfallswhenpriceincreases(ifdemandcurveslopedownward)sothepriceelasticityofdemandisanegativenumber(throughweoftendropthenegativewhenwetalkaboutit).Ifthepriceelasticityisalarge(negative)number,thenquantitydemandedissubstantiallyresponsivetoapricechange---demandiselastic.Ifthepriceelasticityisasmall(negative)number(lessthan1),thenquantitydemandedisnotthatresponsive---demandisinelastic.ConsumerSurplus•Thedemandcurveshowsthevaluethatconsumersplaceonunitsoftheproduct,becauseinindicatesthehighestpricethatsomeconsumeriswillingtopayforeachunit.•Thenetgainisthedifferencebetweenthevaluethatconsumersplaceontheproductandthepaymentthattheymustmaketobuytheproduct.Thisnetgainiscalledconsumersurplus,theincreaseintheeconomicwell-beingofconsumerswhoareabletobuytheproductatamarketpricelowerthanthehighestpricethattheyarewillingandabletopayfortheproduct.•Amajoruseofconsumersurplusistomeasuretheimpactonconsumersofachangeinmarketprice.Supply•Whatdetermineshowmuchofaproductissuppliedbyabusinessfirm(orotherproducer)intoamarket?Afirmsuppliestheproductbecauseitistryingtoearnaprofitonitsproductionandsalesactivities.Oneinfluenceonhowmuchafirmsuppliesisthepricethatthefirmreceivesforitssales.Theothermajorinfluenceisthecostofproducingandsellingtheproduct.•Foracompetitivefirm,ifthepriceatwhichthefirmcansellanotherunitoditsproductexceedstheextra(ormarginal)costofproducingit,thenthefirmshouldsupplythatunitbecauseitmakesaprofitonit.•Thecostofproducinganotherunitdependsontwothings:theresourcesorinputsneededtoproducetheextraunitandthepricesthathavetobepaidfortheseinputs.•Howresponsiveisquantitysuppliedtoachangeinthemarketprice?Onewaytomeasureresponsivenessisbytheslopeofthesupplycurve.Quantitysuppliedismoreresponsiveiftheslopeisflatter.A“unit-free”measureisthepriceelasticityofsupply---thepercentincreaseinquantitysuppliedresultingfroma1percentincreaseinmarketprice.Quantitysuppliedisnotthatresponsivetoprice---supplyisinelastic---ifthepriceelasticityislessthan1.Quantitysuppliedissubstantiallyresponsive---supplyiselasticityisgreaterthan1.ProducerSurplus•Thistotalcostcanbemeasuredasamoneyamount,butforthewholeeconomyitultimatelyrepresentsanopportunitycost---thevalueofothergoodsandservicesthatarenotproducedbecauseresourcesareinsteadusedtoproducethisproduct.•Thenetgainisthedifferencebetweentherevenuesreceivedandthecostsincurred.Thisnetgainiscalledproducersurplus,theincreaseintheeconomicwell-beingofproducerswhoareabletoselltheproductatamarketpricehigherthanthelowestpricethatwouldhavedrawnouttheirsupply.ANationalMarketwithNoTradeTwoNationalMarketsAndtheOpeningofTrade•Thisiscalledarbitrage---buyingsomethinginonemarketandresellingthesamethinginanothermarkettoprofitfromapricedifference.Free-TradeEquilibrium•TheadditionalsupplyintotheUnitedStates,createdbyimports,reducesthemarketpriceintheUnitedStates.•Theadditionaldemandmetbyexportsincreasesthemarke