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Microeconomics Chapter 7: Global Markets in Action

by: Katie Mulliken

Microeconomics Chapter 7: Global Markets in Action Econ 2106H-2

Marketplace > University of Georgia > Economics > Econ 2106H-2 > Microeconomics Chapter 7 Global Markets in Action
Katie Mulliken
GPA 3.91
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Microeconomics Chapter 7: Global Markets in Action Covers class lecture notes, class powerpoint, as well as textbook notes. Material included: imports, exports, comparative advantage, absolu...
Principles of Microeconomics H
Meghan M. Skira
Class Notes
micro, Microeconomics, Econ, Economics, globalmarkets, market, imports, exports, ComparativeAdvantage, absoluteadvantage, freemarket, exportsubsidies, tariffs, importquotas, infantindustry, dumping, outsourcing, rentseeking, voluntaryexportrestraint




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This 4 page Class Notes was uploaded by Katie Mulliken on Tuesday October 11, 2016. The Class Notes belongs to Econ 2106H-2 at University of Georgia taught by Meghan M. Skira in Fall 2016. Since its upload, it has received 3 views. For similar materials see Principles of Microeconomics H in Economics at University of Georgia.


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Date Created: 10/11/16
Chapter 7:  Global Markets in Action BC we trade w people in other countries, the g/s we can buy & consumer isn’t limited by what we can produce Imports – g/s we buy from people in other countries Exports – the g/s we sell to people in other countries Comparative Advantage – fundamental force generating trade between nations… Basis:  Different OCs of countries National Comparative Advantage – ability of nation to perform activity or produce a g/s at lower OC than any other OC of producing a T­shirt is lower in China than in USA   China has Comparative Advantage in producing T­shirts OC of producing a plane is lower in USA than in China   USA has Comparative Advantage in producing planes Both countries gain from trade by specializing in producing the good with their comparative advantage & then trading Free Market  International Trade: Lowers the price of imported goods Raises the price of exported goods Total Surplus = Sum of Green + Blue Gov restricts international trade to protect domestic producers from competition…  4 sets of tools: Export Subsidies  – payments made by the government to a domestic producer of an exported good Gains for domestic producers but creates overproduction in domestic economy  Creates Underproduction in rest of the world  creates Deadweight Loss Tariffs  –taxes on goods imposed by importing country when an imported good crosses its international boundary U.S. gov. imposes $2 import tariff on t­shirts: losses > gains U.S. consumers of t­shirts lose        U.S. producers of t­shirts gain  Imports decrease, which creates social loss (area E) Tariff revenue = Area D  Society loses:  Deadweight loss (created by tariff) area C + E (increased production costs + loss of decreased imports)  Import Quotas  – restriction limiting the max. quantity of a good that can be imported in a given period Quota of 10 mil t­shirts:  Supply of t­shirts in U.S. = S + Quota Market Price rises to $7 Imports decrease Quantity produced in U.S increases  (producers gain)  Quantity bought in U.S decreases    (consumers lose) Society loses:  Deadweight loss (created by quota) area C + E Other Import Barriers  – many of detailed health, safety, & other regulations restrict international trade 7 arguments for restricting international trade: ~ Protecting domestic industries from foreign competition ~ Helps an Infant Industry Grow A new industry or product isn’t as productive as it will be with experience  “Learning­by­Doing” ~ comparative advantages change with on­the­job experience.    ^ Powerful engine of productivity growth (but this doesn’t justify protection) Counteracts Dumping Dumping ~ when foreign firm sells exports at lower price than its cost to produce  Doesn’t justify protection bc:  1) virtually impossible to determine a firm’s costs 2) Global monopoly is difficult; even if all domestic firms driven out, alternatives would still exist 3) If market is truly a global monopoly, it’s better to regulate the monopoly rather than restrict trade Saves Domestic Jobs The idea that buying foreign goods costs domestic jobs is wrong  Imports can destroy jobs but create jobs for retailers that sell imported goods & firms servicing them  Free Trade also increases foreign incomes & enables foreigners to buy more domestic production  Protection to save particular jobs is very costly  Allows us to Compete with Cheap Foreign Labor The idea that a high­wage country can’t compete with a low­wage country is wrong  Low­wage labor is less productive than high­wage labor  Wages & productivity tell us nothing about the source of gains from trade ~ Comparative Advantage Penalizes Relaxed Environmental Standards The idea that protection is good for the environment is wrong  Free Trade increases incomes & poor countries have lower environmental standards than rich ones  These countries can’t afford to spend as much on the environment & sometimes have a Comparative  Advantage in doing “dirty work”, helping global environment attain higher environmental standards Prevents Rich Countries from Exploiting Developing Countries Trading with people in poor countries:  Increases the Demand for Goods that these countries produce &  Increases the Demand for their Labor which in turn raises their wage rate  Trade can expand the opportunities & increase the incomes of people in poor countries Reduces Offshore Outsourcing that Sends U.S. Jobs Abroad Offshore Outsourcing – U.S. firms buy finished goods, components or services from firms in other countries  On average, Americans gain from offshore outsourcing.  The losers are those who have invested in the human capital to do a specific job that’s now offshore Why is international trade restricted? Rent Seeking – lobbying & other political activity seeking to capture the gains from trade (main reason) Free Trade Winners:  the many consumers of low­cost imports  But the benefit per individual consumer is small Free Trade Losers:  the producers of import­competing items (much less than consumers)  These producers have strong incentive to incur the expense of lobbying for tariff & against free trade Voluntary Export Restraint – agreement negotiated between 2 countries that place a numerical limit on the Quantity of a good that can be imported by one country from another country


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