Chapter 9
Application: International Trade
Price of
Steel
Consumer
Surplus
Domestic
Supply
Producer
Surplus
Domestic
Demand
0
Quantity
of Steel
The Equilibrium without Trade
Isolandia and the Steel Market
 If the Government allowed Isolandians to import and
export steel, what would happen to the price of steel and
the quantity of steel sold in the domestic steel market?
 Who would gain from free trade in steel and who would
lose, and would the gains exceed the losses?
 Should a tariff (a tax on steel imports) or an import quota
(a limit on steel imports) be part of the new trade policy?
The World Price and Comparative
Advantage
 Should Isoland import or export steel?
 The answer depends on the relative price of steel in Isoland
compared with the price of steel in other countries
 World Price: price of a good that prevails in the world market
for that good
 If the world price is greater than the domestic price, Isoland
should export steel; If the world price is lower than the
domestic price, Isoland should import steel.
Price of
Steel
Domestic Supply
World Price
After trade
Domestic
Price before
trade
Domestic
Demand
0
Exports
Quantity
of Steel
Gains and Losses of an Exporting
Country
Two conclusions from the Graph
 If the world price is higher than the domestic price, Isoland
will export steel. Once free trade begins, the domestic price
will rise to the world price.
 As the price of steel rises, the domestic quantity of steel
demanded will fall and the domestic quantity of steel supplied
will rise.
Price of
Steel
Domestic Supply
World Price
before trade
Domestic
Price After
trade
Domestic
Demand
0
Imports
Quantity
of Steel
The Gains and Losses of an
Importing Country
Two conclusions
 If the world price is lower than domestic price, Isoland will
import steel. Once free trade begins, the domestic price will
fall to world price.
 As the price of steel falls, the domestic quantity of steel
demand will rise and the domestic quantity of steel will fall.
The Effects of a Tariff
 Tariff: a tax on goods produced abroad and sold domestically
 A tariff raises the price above world price.
Effects of an Import Quota
 Import quota: a limit on the quantity of a good that can be
produced abroad and sold domestically
 Raise the domestic price of the good, reduce the welfare of
domestic consumers, increase the welfare of domestic
producers, and cause deadweight losses
The New President’s Three
Questions:
 1.If the Government allowed Isolandians to import and
export steel, what would happen to the price of steel and
the quantity of steel sold in the domestic steel market?

 2. Who would gain from free trade in steel and who
would lose, and would the gains exceed the losses?

 3. Should a tariff (a tax on steel imports) or an import
quota (a limit on steel imports) be part of the new trade
policy?
The Arguments for Restricting
Trade
 The Job Argument
 The National-Security Argument
 The Infant Industry Argument
 The Unfair Competition Argument
 The Protection as a Bargaining Chip Argument
Case Study: Trade Agreements
 North America Free Trade Agreement
 General Agreement on Tariffs and Trade
 World Trade Organization