Essay Trade Policy

Submitted By ujmirani
Words: 1814
Pages: 8
Open Document
TRADE POLICY I. International Trade A. The Equilibrium without Trade 1. Without Trade: If there is no trade, the domestic price in that market will balance supply and demand (Figure 1). 2. With Trade: a. If the government allows trade, what will happen to the price of the commodity and the quantity sold in the domestic market? b. Who will gain from trade, who will lose, and will the gains exceed the losses? c. Should a tariff (a tax on imported commodity) be part of the new trade policy? Figure 1
Figure 1

B. The Equilibrium with Free Trade -- The World Price and Comparative Advantage 1. The first issue is to decide whether the country should import or export a commodity. a. The answer depends on the relative price of the commodity in that country compared with the price in foreign countries. b. Definition of world price: the price of a good that prevails in the world market for that good. 2. If the world price is greater than the domestic price, the country should export the commodity; if the world price is lower than the domestic price, the country should import the commodity. a. Note that the domestic price represents the opportunity cost of producing the commodity in the country, while the world price represents the opportunity cost of producing abroad. b. Thus, if the domestic price is low, this implies that the opportunity cost of producing the commodity at in domestic economy is low, suggesting that the country has a comparative advantage in the production of that commodity. If the domestic price is high, the opposite is true.

II. The Winners and Losers from Trade A. We can use welfare analysis to determine who will gain and who will lose if free trade begins in Isoland. B. We will assume that, because Isoland would be such a small part of the market for textiles, they will be price takers in the world economy. This implies that they take the world price as given and must sell (or buy) at that price. C. The Gains and Losses of an Exporting Country 1. If the world price is higher than the domestic price, Isoland will export textiles. Once free trade begins, the domestic price will rise to the world price. 2. As the price of textiles rises, the domestic quantity of textiles demanded will fall and the domestic quantity of textiles supplied will rise. Thus, with trade, the domestic quantity demanded will not be equal to the domestic quantity supplied.

Figure 2
Figure 2

3. Welfare without Trade a. Consumer surplus is equal to: A + B. b. Producer surplus is equal to: C. c. Total surplus is equal to: A + B + C.

4. Welfare with Trade a. Consumer surplus is equal to: A. b. Producer Surplus is equal to: B + C + D. c. Total surplus is equal to: A + B + C + D.

5. Changes in Welfare a. Consumer surplus changes by: –B. b. Producer surplus changes by: +(B + D). c. Total surplus changes by: +D.

6. When a country exports a good, domestic producers of the good are better off and domestic consumers of the good are worse off. 7. When a country exports a good, total surplus is increased and the economic well-being of the country rises. D. The Gains and Losses of an Importing Country 1. If the world price is lower than the domestic price, Isoland will import textiles. Once free trade begins, the domestic price will fall to the world price. 2. As the price of textiles falls, the domestic quantity of textiles demanded will rise and the domestic quantity of textiles supplied will fall. a. Thus, with trade, the domestic quantity demanded will not be equal to the domestic quantity supplied. b. Isoland will import the difference between the domestic quantity demanded and the domestic quantity supplied. Figure 3
Figure 3

3. Welfare without Trade a. Consumer surplus is equal to: A. b. Producer surplus is equal to: B + C. c. Total surplus is equal to: A + B + C.

4. Welfare with
Show More

Related Documents: Essay Trade Policy

The Impact Of Trade Agreements On Health Policy In Canada

HSCI 305 week 12 Trade agreements do affect health policy both in Canada & internationally International trade agreements have a significant impact on health policy in Canada Most obvious area is Canada’s drug policy They provide extensive patent protection to the pharmaceutical industry They protect foreign investments in health service sectors They encourage expansion of the TRADE agreements determine the price of pharmaceuticals by guaranteeing patent protection for drug companies, promote…

Words 1805 - Pages 8

Colonization: International Trade and Mercantilism Policies Essay

September 18, 2013 Dear Your Highness, The mercantilism policies established in Britain are very beneficial to merchants like myself and our country as a whole. The Navigational Act implemented in our mercantilism policy was a wise move to help Britain grow more powerful. The life of a mercantilist has changed immensely after the enforcement of these policies and I believe that you should keep them in place. Our mercantilism policies will aid us against the threat of a strong Dutch trading system…

Words 368 - Pages 2

WTO Basics Roles Essay

1947, the GATT has been the major focal point for industrial country governments seeking to lower trade barriers. Although the GATT was initially largely limited to a tariff agreement, over time, as average tariff levels fell, it increasingly came to concentrate on nontariff trade policies and domestic policies having an impact on trade. (See the Glossary to this volume for a list of trade-related policies used by countries.) Its success was reflected in a steady expansion in the number of contracting…

Words 6085 - Pages 25

International Trade and Free Trade Essay

Trade Today: Weighing the Benefits and Consequences of Free Trade Practices Trade amongst human beings has been a basic function of life and community since 30,000BC and still today turns the economic gears that drive the development of all nations in the world (Bernstein, 2008). Human trade practices throughout time have created large divisions of specialized labor producing commodities ranging from textiles to precious metals that are traded with neighboring and distant nations. This process…

Words 1510 - Pages 7

Assignment: International Trade and Wto Essay

international trade is trying to perform certain actions, i.e., doing some politic in this area. There are two main types of policy in the field of international trade: 1. Foreign Trade Policy. 2. International trade policy. Trade policy - relatively independent direction of fiscal policy of the government related to the state regulation of foreign trade through taxes, subsidies and direct restrictions on imports or exports. Most economists consistently advocated the liberalization of foreign trade, as the…

Words 5631 - Pages 23

Individual Paper

International Trade and Finance Speech Christopher Allen Lamerson ECO/372 May 6, 2013 Blake Bennett International Trade and Finance Speech When the country exports product to the United States, and the state received a surplus on imports, it means the country that exported the product has a favorable trade balance, or a surplus. When there is a surplus in products, it signifies a price drop, even if the country is selling at a loss. The reason this happens is due to buyers already paying…

Words 815 - Pages 4

Is Free Trade Fair? Essay

1. Is free trade fair? You will need to explain what free trade is, which trade theories seek to explain free trade, and whether you assess free trade to be fair. You must use examples to support your arguments. 1) benefits 2) costs + criticisms 3)case study 4)member states 5)non member states 6) case study 7) yes or no Introduction Free trade as defined by Hill (2009) implies that a country and its citizens can purchase goods from another country or produce and sell goods to another…

Words 2993 - Pages 12

Emission Reduction Essay examples

Baker | 3/10/2013 | | The two policies that I chose that could be used to reduce the total amount of emissions are Cap and Trade, and a Carbon Tax. They both “create incentives for businesses and households to conserve energy, improve energy efficiency, and adopt clean-energy technologies” (Policy Basics, 2013). “The Cap and Trade policy specifies the amount of allowable emissions” (Policy Basics, 2013). “A Carbon Tax is the obverse of Cap and Trade: rather than fixing the amount of allowable…

Words 540 - Pages 3

Who Is The Council Of National Economic Council

the United States) is the chair of National Economic Council. It has four principal functions: to coordinate policy-making for domestic and international economic issues, to coordinate economic policy advice for the President, to ensure that policy decisions and programs are consistent with the President's economic goals, and to monitor implementation of the President's economic policy agenda. 2. Who is the chair of Council of Economic Advisers? Jason Furman is the chair of Council of Economic…

Words 376 - Pages 2

ECON401 Assign2 Essay

Political arguments cover a range of issues: preserving jobs; protecting industries deemed important for national security; retaliating against unfair foreign competition; protecting consumers from "dangerous" products; furthering the goals of foreign policy; and advancing the human rights of individuals in exporting countries. Protecting Jobs and Industries: This argument is for protecting jobs and industries from unfair competition. Governments intervene by placing duties and tariffs on certain imports…

Words 1497 - Pages 6