globalization and international trade lecture 8 – academic year 2015/16 introduction to economics...

Globalization and International Trade

Lecture 8 – academic year 2015/16

Introduction to EconomicsDimitri Paolini

What do we do today?

• Lect. 8: the welfare effects of globalization

• Lect. 8: is it convenient to impose a tax on Chinese shoes imported in Europe? If so, convenient for whom?

Question of the day

Who made our shoes?

Globalization

What’s “globalization”?

Process of growing economic and financial, e.g. exchange of goods and financial activities (assets).

We ask:

• Which are the effects of globalization on welfare?

• Who gain and who looses from the free trade among nations?

World exports of goods(Billions US $ x 1000)

1012141618

European Union (15) World

Updating… the crisis

Equilibrium in the absence of international exchanges

Economy without international exchanges (“closed”): the price adjusts so as to equalize internal demand and supply.

Equilibrium in the absence of exchanges

Price of steel

Equilibrium price

0 Quantity of steelEquilibriumquantity

Internal supply

Internal demand

Consumer surplus

Producer surplus

EXAMPLE – Market for steel

Hypotheses:

•A country that is not in contact with the rest of the world and produces steel.

•The market for steel consists of producers and consumers of that country.

Equilibrium in the absence of exchanges

Opening to international trade: questions

If a country opens to international trade, what happens to exporters and importers of steel?

Who gains and who looses from the opening of the market (= globalization)?

Are the gains of some compensated by the losses of the others?

Baseline hypothesis: the country is SMALL in the world market.

Hence: it behaves like consumers and producers under perfect competition.

Take the world price as a given.

The country decides whether to sell or buy steel to/from the world market.

Opening to international trade

World price and comparative advantage

If a country has a “comparative advantage” in the production of a good,

then: internal price < global price

– why? Price= opportunity cost

In this case: the country becomes an exporter of that good

If a country does not have a “comparative advantage”,

then internal price > global price.

In this case: the country becomes exporter of that good

World price and comparative advantage

International trade in an importing country

If global p < internal p,

“once the borders are opened”, the country becomes an importer of steel.

Key question: who do the consumers want to buy from (given that they are free to choose) ?

Price of steelPrice of steel

Price in a closed Price in a closed economyeconomy

00 Quantity of steelQuantity of steel

Internal supplyInternal supply

Internal demandInternal demand

World priceWorld price

Internal consumers want to buy steel at a lower price.

– For small quantities, the most efficient among the internal producers can satisfy demand

– For larger quantities, the internal producers are too inefficient compared to foreign competitors and imports

Internalquantitysupplied

Internalquantitydemanded

Import

Import=

Internal quantity demanded – internal quantity supplied, at the world price.

Internal price until internal p = global p

Internal consumption and internal production i.e., the country becomes an importer of steel.

Consumer surplus in a closed economy

Import

Consumer surplus in a closed economy

World priceWorld priceImport

Produce surplus in aclosed economy

Consumer surplus in a open economy

Produce surplus in aopen economy

Additional surplus in an open economy

Gains and losses from free trade

When a country opens its frontiers to free trade becoming an importer, its consumers gain.

They pay a lower price and can buy more.

The national producers, instead, are damaged.

They receive a lower price and sell less units.

Overall, international trade increases the total welfare of the country.

The net variation of total welfare (surplus) is positive

The gains of consumers are greater than the losses of producers.

Gains and losses from free trade

The effects of a custom duty

A custom duty is a tax on a good produced abroad and imported.

A custom duty increases the global price proportionally.

National producers take advantage of the duty, while consumers experience a loss.

Import without Import without dutyduty

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Price without Price without dutyduty

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Consumer surpluswithout duty

Producer surplus Without duty

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Price with dutyDuty

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Price with dutyDuty

QS2 QD

Price without Price without dutyduty Import with

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Price with dutyDuty

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Producer surplus with duty

Price with dutyDuty

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Public revenue

Price with dutyDuty

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Net loss due to the dutyNet loss due to the duty

Public revenue

As any other tax, a duty creates a distortion in incentives and affects the optimal allocation of resources

The argument in favour of restrictions to free trade

• Employment

• National security

• Infant industry protection

• Dumping

• Protectionism as bargaining tool

Through the comparison between internal price and world price one can identify which countries are exporters and which are importers of a particular good.

Globalization means:

In exporting countries, producers gains, while consumers loose.

In importing countries, consumers gain, while producers loose.

In both cases gains are greater than losses.

Conclusion

The custom duty. . .

•Increases the national price of a good.

•Reduces the welfare of internal consumers

•Increases the welfare of internal producers

•Creates a net loss in terms of welfare

globalization and international trade lecture 8 – academic year 2015/16 introduction to economics...

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