ECON 101 Lecture Notes - Lecture 10: Trade Route, Free Trade, Marginal Product
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Trade and domestic prices
When market open to trade, competition among importers and
exporters drive domestic price to equality with the world price
WORLD PRICE LOWER THAN DOMESTIC PRICE
• Import: if world price is lower than domestic price—> imports
good —> domestic price falls towards world price
Imports: World price lower than domestic—> net benefits increase for importing country
• CS gains exceed PS loss
• Consumer gain—> prices fall
• Domestic suppliers lose —> less bought, demand for workers drop, reduce wage
WORLD HIGHER LOWER THAN DOMESTIC PRICE
export: if world price is higher than domestic price —> export good
—> rise in domestic price
Net benefits increase for exporting country: producer gain exceeds consumer losses
• Producers gain —> prices increase, demand for workers increase, wage increases
• Consumers lose—> prices increase
Free trade when gov does not attempt to reduce or increase levels of exports or imports
Tariff: tax on imports—> raises domestic price above world price—> fall in trade and TC—> Rise
in domestic production
• Domestic producers and government gain
• Consumers lose (more than gain, DWL)
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