Chapter 6: International Trade
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International Trade
How much to import or export?
What happens if the government intervenes by
implementing trade policies?
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International Trade
Definitions:
The Domestic Price represents the equilibrium
price that would occur in a country if no
international trade is allowed.
The World Price represents the equilibrium price
on the international market.
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International Trade
Definitions:
A Small Open Economy is an economy that
participates in international markets, but its
production (or consumption) is small enough
compared to the rest of the world that its supply
(or demand) does not affect the world price.
A Closed Economy is an economy that does not
engage in international trade. Also known as
autarky.
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International Trade
 Has a certain Pd (domestic price), and
 takes Pw (world price) as given
 no seller will accept less than Pw as he can
always sell overseas at Pw;
 no buyer will pay more than Pw as she can
always buy from overseas at Pw.
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A. Exporting
Say Pd = $10 and Pw = $15
P* = Pd = $10 P* = Pw = $15
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A. Exporting
Say Pd = $10 and Pw = $15
P* = Pd = $10 P* = Pw = $15
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If Pd < Pw
 Exporter!!!
A. Exporting
Why we generally want
countries to open up to trade?
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A. Exporting
Say Pd = $10 and Pw = $15
P* = Pd = $10 P* = Pw = $15
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Gains from
Trade!
A. Exporting
Definition:
The Gains from Trade capture the extra surplus
available in an open economy compared to a
closed economy.
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A. Exporting
The Gains from Trade come from
international consumers (at the
expense of domestic consumers
surplus)!
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B. Importing
Say Pd = $3 and Pw = $2
P* = Pd = $3 P* = Pw = $2
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B. Importing
Say Pd = $3 and Pw = $2
P* = Pd = $3 P* = Pw = $2
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If Pd > Pw
 Importer!!!
B. Importing
Why we generally want
countries to open up to trade?
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B. Importing
Say Pd = $3 and Pw = $2
P* = Pd = $3 P* = Pw = $2
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Gains from
Trade!
B. Importing
The Gains from Trade come from
larger surplus for domestic consumers
(who now buy at lower prices)!
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Additional Benefits from Trade
have access to a wider variety of goods
(Italian soft drinks, Indian movies),
may be able to take advantage of
economies of scale by selling to a larger market
(bauxite, copper),
or oligopolies might face
international competition, reducing their market
power (bookstores),
is faster and easier. 
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C. Trade Restrictions: Tariffs
Definition:
An Import Tariff represents a tax on imported
goods or services.
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C. Trade Restrictions: Tariffs
Say Pw = $15 & t = $10  Pd = Pw + t = $25 (all books)
P* = Pw = $15 P* = Pd = $25 © Playconomics, LHS 19
C. Trade Restrictions: Tariffs
Domestic BUT
domestic
 is a tariff good or bad?
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C. Trade Restrictions: Tariffs
Say Pw = $15 & t = $10  Pd = Pw + t = $25 (all books)
P* = Pw = $15 P* = Pd = $25
Loss
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C. Trade Restrictions: Tariffs
Domestic BUT
domestic
Deadweight Loss  Tariff is bad!
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D. Trade Restrictions: Quotas
Definition:
An Import Quota represents a quantity limit on
the amount of goods or services permitted to be
imported.
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D. Trade Restrictions: Quotas
Say q = 2,000 books per month
Q*, P*=$25 Q* = Qd+q, P*=$25 © Playconomics, LHS 24
D. Trade Restrictions: Quotas
Domestic BUT
domestic
 is a quota good or bad?
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D. Trade Restrictions: Quotas
Say q = 2,000 books per month
Q*, P*=$25 Q* = Qd+q, P*=$25 © Playconomics, LHS 26
Loss
D. Trade Restrictions: Quotas
Say q = 2,000 books per month
Q*, P*=$25 Q* = Qd+q, P*=$25 © Playconomics, LHS 27
Importers Bonus!
D. Trade Restrictions: Quotas
Domestic BUT
domestic
Deadweight Loss  Quota is bad!
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