Chapter 7 – Global Markets in Actions
How Global Markets Work
Imports - the goods and services we buy from other countries
Exports – the goods and services we sell to people in other countries
What Drives International Trade?
Comparative advantage drives international trade, fundamental force
Comparative advantage – a situation in which a person can perform an activity or produce a good or
service at a lower opportunity cost than anyone else.
 National comparative advantage – a situation in which a nation can perform an activity or
produce a good or service at a lower opportunity cost than any other nation
Why Canada Imports T-shirts
Without imports, Canada supplies 4 million T-shirts for $8; with imports the world price for t-shirts is $5
so Canada demands 6 million t-shifts while it only supplies 2 million and it imports 4 million a year
 Price in Canada falls to world market price
 Quantity bought increases; quantity demanded at world price
Why Canada exports Regional Jets
Without exports, Canada supplies 40 jets for $100 million, with exports Canada supplies 20 jets and
produces 70 jets at $150 where they exports 50 jets
 Price rises to world price
 Quantity demanded decreases; quantity demanded at world price
We match the prices to the world market and compare to that product, we see how much we buy or
export
 If the equilibrium price is lower than the world market , Canada exports
 If the equilibrium price is higher than the world market, Canada imports
Winners, Losers, and the Net Gain From Trade
The winners of trade are the ones whose surplus increases and the loser are the ones that their surplus
decreases.
Consumer’s gain on imports – lower price, increased purchases
 Consumers’ surplus changes to A + B + D
o B – the loss of producer surplus
o C – a net gain; lower price, increased purchases, gain from imports
Producers’ gain from exports – higher price, increased production
 Producers’ surplus changes to B + C + D
o B – the loss of consumers’ surplus
o D – net gain; higher prices, increased production, gain from exports
International Trade Restrictions
Governments use these tools to influence international trade and protect domestic industries from
foreign competition:
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Tariffs
Import quotas
Other import barriers
Export subsidies
Tariff – a tax on a good that is imposed by importing country when an imported good crosses its
international boundary
 Provide revenue to the government
 Allows the government to satisfy the self-interest of the people who earn their incomes in the
import-competing industries
The Effects of a Tariff
Without a tariff, Canada produces 2 million at $5, imports 4 million at $5, and Canadians buy 6 million tshifts
When tariff is added
 The production of t-shirts in Canada increases
o Increase of 1.5 million so producer 3.5 million at $7
 The imports of t-shirts decreases
o Instead of importing 4 million, import 1 million at $7
 Canada collects tariff revenue
o $2 per 1 million imported (purple rectangle)
 The price of t-shirt increases
o Increases to world price + tariff, $7
 Decrease in purchases
o About 2.5 million of a decrease to 4.5 million purchases
Tariff on imported goods creates winners, losers, and social loss
 Canadian consumer loss – the price of a t-shirt rises and quantity demanded decreases
 Canadian producers gain – producers sell their t-shirts for more world price + tariff. Higher price,
quantity increases
 Society loses, deadweight loss arises – some loss transferred to producer and some to the
government but because production cost increase and loss from imports it’s a society loss
 Consumers lose more than producers
Before tariff, consumers’ surplus increases, B + C + D
 After tariff imposed
o Producers gain a little more
o C and E are deadweight loss
o D is tariff revenue
Import Quotas
Import quota – a restriction that limits the maximum quantity of a good that may be imported in a given
period.
 Price rises
 Quantity bought decreases
 Quantity produced in Canada increases
The supply curve shifts to Supply + Quota
Winners, Losers, and the Social Loss from an Import Quota
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Canadian consumers of the good lose
Canadian producers of the good gain
Society loses, deadweight loss
Importers of good gain
Producers gain – B; Dead weight loss C + E, imports’ profit D
The difference between quota and tariffs is tariffs bring revenue for government while quota bring
revenue to the importers
Other Import Barriers
Other barriers include health, safety, and regulation barriers and voluntary export restraint.
Export Subsidies
Subsidy – a payment by the government to a producer
Export subsidy – a payment by the government to the producer of an exported good
 Illegal
 Brings gains to domestic producers
 Inefficient underproduction for the rest of the world
 Create deadweight loss
The Case against Protection
Infant-industry argument – it is necessary to protect a new industry to enable it to grow into a mature
industry that can compete in world markets.
 Learning by doing benefits owners , workers , and spill over to other industries in the economy
 More efficient to use subsidy encourage maturity of industry and compete in the world market
Dumping – a foreign firm sells its exports at a lower price than its cost of production
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In order to gain a global monopoly, to drive domestic firms out of business
Illegal under the rules of WTO
Temporary tariffs called antidumping duties
Hard to track if dumping is occurring
o Test compare with domestic price
 Hard to find a good produced by a global monopoly
 Dealing with it by regulation
Reasons for Trade
Saves jobs – creates and destroys old ones for new ones
Allows us to compete with cheap foreign labour
Penalizes lax environmental standards – make trade but eventually could match up with the higher
income but poorer countries might want to do dirty work that allows other countries to have a higher
environmental standards
Prevents rich countries from exploiting developing countries – can increase their income trade and
cause a stop to child labour and near-slave labour since incomes increase and demand for labour
increase
Offshoring  hiring foreign labour and produce in other countries
o
Buy finished goods, components, or services from other firms in other countries
Outsourcing buy finished goods, components, or services from other firms in Canada
o
Buy finished goods, components, or services from other firms in other countries
Offshoring outsourcing  buy finished goods, components, or services from other firms in other
countries
Why is Offshoring a Concern?
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Fear of losing jobs but even though you import services from other countries, Canada also
exports
Winners and Losers
Losers are those that invested in the human capital to do a job that is now gone offshore
Why is International Trade Restricted?
Tariff revenue – keep track might be hard
Rent seeking – lobbying for special treatment by the government to create economic profit or to divert
consumer surplus or producer surplus away from others