IntroductoryMicroeconomicsEconomics10004

ProfessorPhillipMcCalmanUniversityofMelbourne

Internationaltrade

Theriseofinternationaltrade:

TradeShareofGDP

1960

1970 1980

1990

Year

2000

2010

World

AustraliaEuropeanUnion

UnitedStates

80

Trade(%ofGDP)

20 40 60

0

Source:WorldBank

Internationaltrade

Whydowehaveinternationaltrade?

Countrieshavedifferentresourceendowments

So,theyspecialiseintheproductionofgoods/servicesforwhichtheyhaverelativelylowopportunitycostsinsupply

Comparativeadvantagereferstotheabilitytoproduceagood(orservice)ataloweropportunitycostthananotherproducer

Conversely,countriestendtoproducelessofthegoodsinwhichtheyhavecomparativedisadvantage

Theythentradeontheglobalmarkets:exporting(importing)goodsinwhichtheyhavecomparativeadvantage(disadvantage)

Presumably,countriesdothisbecausetherearegainsfromtrade

Howdowemeasurethesociety’swell-beingfromtheirengagementininternationaltrade?

First,supposeweareina“no-trade”autarkyworldinwhicheverycountryproducesandconsumesdomestically

Ifthesedomesticmarketsareperfectlycompetitive,thenwecanmeasurewelfareattheequilibrium{P?,Q?}usingthe“totalsurplus”approach

Internationaltrade

S

D

P

P*

Q* Q

Internationaltrade

Next,consideraworldmarketinwhichaworldpricePWispre-determined

Mostcountriesare“small”intermsoftheircontributiontodemand/supplyrelativetotheworldmarket,sotheirbuyersandsellerswillbeprice-takers(i.e.theycannotunila llyinfluencetheworldprice)

IfPW>P?

AttheprevailingpricePW,QD(PW)<QS(PW)sotherei cesssupply

Somedomesticsellerswillsell(i.e.export)totherestoftheworld

Comparativeadvantageinproducingthisgood

Welfareimprovesasaresultofinternationaltrade,anddomesticsellers(buyers)arewinners(losers)

Internationaltrade

S

Exports

D

P

PW

P*

QD(PW)Q* QS(PW) Q

S

Exports

A

B

D

C

D

P

PW

P*

QD(PW)Q* QS(PW) Q

Internationaltrade

Autarky

Trade

Difference

CS

A+B

A

-B

PS

C

B+C+D

B+D

TS

A+B+C

A+B+C+D

D

IfPW<P?

AttheprevailingpricePW,QS(PW)<QD(PW)sotherei cessdemand

Somedomesticbuyerswillbuy(i.e.import)fromtherestoftheworld

Comparativedisadvantageinproducingthisgood

Welfareimprovesasaresultofinternationaltrade,anddomesticbuyers(sellers)arewinners(losers)

Internationaltrade

S

A

B

D

D

ports

Im

C

P

P*

PW

QS(PW) Q* QD(PW) Q

Internationaltrade

Autarky

Trade

Difference

CS

A

A+B+D

B+D

PS

B+C

C

-B

TS

A+B+C

A+B+C+D

D

ernmentssometimesintervenewithprotectionistpolicies,suchas:

Importtariffs

Exportsubsidy

Importquotas

Anti-dumregulations

“BuyAustralia”ns

Forexample,whatistheeffectofanimporttarifftwhenPW<P??

Allimportsaresubjecttoapriceincrease(fromPWtoPW+t),whi ovesthemarketclosertotheautarkyequilibirum

Theimporttariffismeantto“protect”domesticsellersbypenalisingforeignsellers

tydbydomesticsellersincreases,whiletydemandedbydomesticbuyersdecreases

Unsurprisingly,importsalsodecrease

Internationaltrade

S

D

P

PW+t

PW

QS(PW) QD(PW) Q

Internationaltrade

Whataboutitsimpactonwelfare?

Domesticsellers(buyers)arewinners(losers)

Theernmentalsobenefitsfromtaxrevenue

Overall,totalsurplus(i.e.welfare)decreases

Whatistheintuitionbehindthedeadweightloss?

Internationaltrade

S

A

B

F

D

G

E

D

C

P

PW+t

PW

QS(PW) QD(PW) Q

Internationaltrade

Trade Tariff Difference

CS

AtoF

A+B

-C-D-E-F

PS

G

G+C

C

TariffRevenue

0

E

E

TS

AtoG

A+B+C+E+G

-D-F

Impactsofglobalisationandworldtrade

Economictheorypredictsthatremovingtradebarriersincreaseswelfare

Thereisagreatdealofevidenceconsistentwiththisprediction:

Reductioninworldpovertyandinequalityineraofglobalisation

Strongoutputgrowthincountriesthathaveincreasedintegrationwiththeworldmarket

Increa