Benefits:

-Lower price -specialize = efficiency

-Taking advantage of different factor
endowments -differences in resources base
-Economies of scale
-Increased variety/choice
-Acquisition of needed resources
-Competition can improve efficiency
-Political benefits -encourage compromise and
resolution over conflict and antagonism for
predictable supply and steady & reliable output
-Efficiency and exports = growth and
development -develop comparative advantages,
more efficient allocation of resources, boost GDP
Critics' view:
-negotiations favor rich
-gains benefit rich
-poor cannot afford representatives
-rich are getting richer
-no address on tariff escalation
-agricultural subsidies have not been
reduced
-innovation cannot spread to developing
rich use other barriers instead of tariffs
-ignore rights and safety issues
Supporters' view:
-promotes peace, reduce conflict
-place to handle disputes constructively negotiation, compromise
-based on rules not power, protect small
countries
-free trade cuts cost of living
-choice and variety
-boost incomes
-increases economic growth &
employment
-efficiency & simplicity
-shields countries from narrow interests
-good incentives for better government
Comparative advantage and opportunity
cost
-comparative advantage - when a country
produces a good at a lower domestic
opportunity cost than another country
-countries should specialize in the
production of whatever has the lowest
opportunity cost and trade to enjoy higher
standard in living
Sources of comparative
advantage
-relative abundance of resources
-value of the good produced from
the resource
limitations of comparative advantage
-perils of extreme specialization
-unrealistic assumptions
-transport costs, identical, perfect
information, constant costs, only 2 country,
full employment, free trade

Arguments against
protectionism
-Misallocation of resources
-Escalation to trade war
-Protectionism as a corruption
magnet
-Domestic complacency
causes higher prices and
costs
-Higher import costs
-Reduced export
competitiveness

Arguments for protectionism

-To protect domestic employment
-To protect sunrise or infant industries
-To counteract relative domestic tax differences
-To prevent the dumping of foreign goods onto
the domestic market
-To diversify the production base of a
developing country
-To enforce product standards
-To raise government revenue
-To protect against unfairly low labor costs
-To protect strategic industries
-To overcome a balance of payments deficit
-To improve the terms of trade

Aims of the WTO

-Trade without discrimination
-Freer trade through negotiation
-Predictability through binding
and transparency
-Promoting fair competition
-Encouraging development

Tariffs - an import tax placed on a good produced abroad

-added cost, decreases supply
Domestic producers
higher price, sell more 0-Q1 -> 0-Q2, revenue PwQ1 to
Pw+TQ2
Foreign producers
export less, Q1-Q4 -> Q1-Q2
Government revenue: E
Consumers
Higher prices, smaller quantity 0-Q4 -> 0-Q3
Welfare loss: d+f
-restrict demand from 0-Q4 -> 0-Q3

Functions:
-provide a forum for trade negotiation
-execute WTO agreements
-evaluate and rule on trade
complaints by member countries
-provide technical assistance to
developing countries on trade issues
-track changes in member trade
policies
domestic opportunity cost X
= output Y/output X = Y
domestic opportunity cost X
= input Y/input X = Y
cross market comparison
compare - smaller #

Quotas - limit on the physical quantity of a good that

can be imported
-Domestic production increases from 0Q1 to 0Q1+Q3Q4, sell
more at higher prices (Pw+Quota)
-Domestic consumption fall from 0Q2 to 0Q4
-Imports fall from Q1Q2 to Q1Q3 paying Pw,to Pw+Quota
-government gets no advantage
-market inefficiency - decrease in consumption and production
by less efficient producers
-J and K represents the dead weight loss of welfare to the
society, as J represents production by inefficient producers and
K represents the loss of consumer surplus.

protectionism - placement of legal restrictions on

international trade
-protect from unpredictability and foreign
competition
infant industries - newly developed not had
opportunities to develop economies of scale
dumping - selling of goods to another country
below original

Voluntary export restraints - selfimposed quota

Administrative barriers
Bureaucratic barriers
Product standards
Environmental standards
Qualifications

Domestic Producer before:

PworldxQdomestic
Domestic Producer after:
Pt/q/sxQndomesttic
Foreign producer before:
PworldxQimports
Foreign producer after:
PworldxQnimports
Consumer surplus before/after:
1/2(highestP-Pworld)xQworld
Government revenue/expenditure
amount x #imports
Social welfare:
area of triangle

Subsidies - government payment to a firm that can be

used to promote exports and/or reduce quantity of
imports
-Consumption remains at Q3.
-Taxpayers lose as the tax revenue collected is being used
for subsidies
-Domestic producers gain as the production increases from
0Q1 to 0Q3.

-International Trade - buying and selling of goods and services across country borders
-growth occurs because it benefits both parties to the transaction
-all countries have valuable resources and using their different resources to the fullest through
specializing and trading should yield extra wealth for all.