Professional Documents
Culture Documents
3.1
The basis for trade
If relative p
prices differ and there are no
impediments to trade then trade will be
profitable.
Example:
price off x
price of y
country A
$
$2
$6
country B
240
480
Buy-sell strategy:
1. buy 2 units of x in A
2. sell 2 units of x in B
and
buy 1 unit of y in B
3. sell 1 unit of y in A
(cost = $4)
(receipts= 480)
(cost= 480)
(receipts = $6)
Note on trade:
1. We trade because it is profitable to do so.
- same as intra-national trade
- in the interests of private individuals
- trade is also socially profitable in that it
allows consumption possibilities to lie
outside the PPF
Country A
y
possible
consumption
point
Consumption
Possibility
Frontier (CPF)
assuming can
trade at fixed
px/py=1/2
PPF
1
3
1
production
point
2
x
3.2
Supply and demand
in the small open
p
economy
y
3.2.1
3.2.2
3.2.3
3.2.4
3.2.1
International prices
Supply & demand for importables
Supply & demand for exportables
Supply & demand for nonnontradeables
International prices
price
price
price
S
S
pcif
pfob
pcif
pcif
pfob
pfob
D
(1)
importables
3.2.2
price
p
D
quantity
quantity
(2)
exportables
quantity
(3)
non-tradeables
S MC
S=MC
supply from
r.o.w.
pcif=p* e + z
quantity
qs domestic
qs imports
Exercises
Show that for domestic producers of
importables:
changes in domestic demand are not
important for determining output and
prices
increases in costs cannot be passed on
to buyers
the exchange rate is important for
dete mining output
determining
o tp t and prices
p ices
(assume the good remains an importable
with these changes)
3.2.3
domestic
demand
S=MC
pfob=p* e - z
D
quantity
qd domestic
qd exports
Exercises
Show that for domestic producers of
exportables:
changes in domestic demand are not
important for determining output and
prices
increases in costs cannot be passed on
to buyers
the exchange rate is important for
dete mining output
determining
o tp t and prices
p ices
(assume the good remains an exportable
with these changes)
3.2.4
pcif=p* e + z
p0
pfob=p* e - z
D
q0
quantity
3.3
The effects of trade
3 3 1 Importables
3.3.1
3.3.2 Exportables
3.3.3 The gains from trade
3.3.1
Importables
Domestic S & D
price
S & D of imports
price
S
1
p0
pcif
p0
pcif
D
q1s
q0
q1d
quantity
Simports
Dimports
10
3.3.2
Exportables
Domestic S & D
price
price
p0
Sexports
5
pfob
S & D of exports
pfob
p0
Dexports
7
D
q1d q0 q1s
quantity
Dimports
0
(q1s - q1d)
quantity
exports
11
3.3.3
12
3.4
Interventions in
importables
p
3.4.1
3.4.2
3.4.3
3.4.4
Consumption tax
Production subsidy
Import tariffs
Import quotas
Blank slide
13
3.4.1
Consumption tax
price
S
pb = ps + t
ps = pcif
2 3 4
pcif
6
q0
q1
D
q0
quantity
14
3.4.2
Production subsidy
price
S
ps = pb + s
pb = pcif
pcif
5
q0
q1
D
s
q0
quantity
15
Alternative approaches
to welfare analysis of a subsidy
Net benefit (NB) measures:
NB = Value of additional output
- additional factor cost - subsidy
= [(1)+(2)+(5)] -[(2)+(5)]
[(2)+(5)] -[(1)+(2)]
[(1)+(2)] = -(2)
(2)
NB
NB
Blank slide
16
3.4.3
Import tariffs
Tax on imports
price
S
pb = ps = pcif +
pcif
3 4
5
q0
pcif
6
q1
q1
D
q0
quantity
Effects of tariff:
prices:
increases in ps and pb
by $ per unit
production:
increases to q1s
consumption: decreases to q1d
imports:
decrease to q1d - q1s
revenue:
increases by (q1d - q1s)
welfare:
decreases by areas (2) + (4)
= cost of protection
Other effects of tariffs
Although not shown
exports decrease because exporters face cost
increases and lose resources
employment increases in the tariff-protected
industry but decreases elsewhere
17
Note on tariffs:
1. The effects of a tariff are identical to the
effects of a production subsidy combined
with a consumption tax.
2. The cost of protection would be larger
if protected firms were foreign owned.
In this case, part of the increase in
producer surplus would accrue to
overseas residents and thus would not
increase domestic welfare.
welfare
Blank slide
18
3.4.4
Import quotas
S&D of imports
price
price
S
Simports with quota
p1
pcif
2 3 4
pcif
D
quantity
Simports
Dimports
quantity
imports
19
20
3.5
Interventions in
exportables
3.5.1
3.5.2
Production subsidy
Export subsidy
Blank slide
21
3.5.1
Production subsidy
ps = pfob+ s
pb = pfob
D
q0d
q0s
q1s
quantity
22
3.5.2
Export subsidy
S
2
1a 1b
D
q1d q0d
q0s
q1s
quantity
23
24