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9.2 The Winners and Losers from Trade

9.2 a. The Gains and Losses of an Exporting Country

If the domestic suppliers can supply the product for less than the world price then they will be able to sell their product worldwide at the world price. The domestic supply increases until equilibrium is reached with the world price. Since the world price is higher than the domestic price, producers will continue to sell in the worldwide market rather than the domestic market until the domestic price increases to the world price; thus, domestic demand will decline. However, the country benefits because the producer surplus is increased by the higher price which compensates for the loss of consumer surplus to the domestic buyers. There is an additional gain of producer surplus that is not offset by a loss of consumer surplus by selling on the world market. Hence, total surplus is maximized by exporting in the world market. [6]

Example: The domestic prices of textiles goes up in a country if it starts exporting textiles, the demand decreases while the supply increases which is then exported. The production costs would still be the same.

Gains of an Exporting Country [7]

9.2 b. The Gains and Losses of an Importing Country

The opposite occurs when the domestic producers cannot supply the product at or below the world price. In this case, the wealth of the economy is maximized by allowing the importation of the good or service. This increases consumer surplus at the expense of producer surplus, but there is an additional consumer surplus that results from more people buying the product because of its lower price. Hence, allowing international trade makes everyone better off, which is one of the guiding objectives of economics. [6]

Example: Importing phones made in China reduces the market price to match the world price.

Gains of an Importing Country [7]

9.2 c. The Effects of a Tariff

A tariff is a tax on imported goods, usually assessed to protect domestic suppliers. Tariffs raise the prices of imports, reducing their quantity, and moving the market for that good or service closer to what the domestic market equilibrium would be without international trade. Sellers benefit because they can charge a higher price for their product and, thus, enjoy increased producer surplus. The government benefits by collecting the revenue which a tariff generates when people buy the imported products. [6]

Example: When tariffs are imposed on automobiles, their prices match the market equilibrium price.

Effects of a Tariff [8]

9.2 d. Other Benefits of International Trade

The advantages of international trade are that a greater variety of goods and services can be provided to the world market at lower prices because of differences in people’s knowledge and skills, differences in available resources and their costs, and simply because many more people compete to create products for the market. Moreover, a larger market provides more possibilities through economies of scale, which may not be realized by selling only to a domestic market. Increased world competition may also limit monopolies or oligopolies. [6]

Example: By opening up an auto parts market for international trade, China’s exports grew from $7.4 billion in 2002 to $69 billion in 2011, which helped the auto part companies improve their product quality, competitiveness and investments from foreign automakers. [9]

Benefits of International Trade for US Economy [10]

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Principles of Macroeconomics Copyright © by Dr. Kaustav Misra is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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