Chapter 09s
Transcript of Chapter 09s
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Application:
International Trade
Chapter 9
Copyright 2001 by Harcourt, Inc.
All rights reserved. Requests or permission to ma!e copies o any part o
the
"or! should be mailed to#$ermissions %epartment, Harcourt &ollege $ublishers,
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
International Trade
Who gains and wholoses rom ree
trade among
countries?
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
International Trade
What are thearguments that
people use to
ad!ocate traderestrictions?
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Equilibrium Without Trade
"ssume#
" country is isolated rom rest
o the world and produces steel$
%he mar&et or steel consists o the
buyers and sellers in the country$
'o one in the country is allowed to
import or export steel$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Equilibrium Without Trade...
Priceof Steel
EquilibriumPrice
0 Quantity
of Steel
Equilibrium
quantity
Domestic
supply
Domesticdemand
Producersurplus
Consumersurplus
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Equilibrium Without Trade
(esults#
)omestic price ad*usts to balancedemand and supply$
%he sum o consumer and producer
surplus measures the total beneits thatbuyers and sellers recei!e$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
World Price and ComparativeAdvantage
I the country decides to engage in
international trade, will it be an
importer or exporter o steel?
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World Price and Comparative
Advantage
%he eects o ree trade can be shown by
comparing the domestic price o a goodwithout trade and the world priceo the
good$ %he world pricereers to the
pre!ailing price in the world mar&ets$ " country will either be an exporter or an
importer o the good$
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World Price and Comparative
Advantage
I a country has a comparati!ead!antage, then the domestic price
will be below the world price, and
the country will be an exporterothe good$
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World Price and Comparative
Advantage
I the country does not ha!e a
comparati!e ad!antage, then thedomestic price will be higher than the
world price, and the country will be
an importero the good$
H t I it d d i d it i ht 2001 b H t I
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Priceof Steel
0 Quantityof Steel
Domesticdemand
International Trade in an
Exporting Country...
Domesticsupply
Worldprice
Price aftertrade
Exports
Domestic
quantitydemanded
Domestic
quantitysupplied
Pricebeforetrade
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
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Priceof Steel
0 Quantityof Steel
Worldprice
Domesticdemand
How Free Trade Affect Welfare in
an Exporting Country...
Domesticsupply
Price aftertrade
Pricebeforetrade
A
B
C
D
Exports
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Priceof Steel
0 Quantityof Steel
Worldprice
Domesticdemand
How Free Trade Affect Welfare in
an Exporting Country...
Domesticsupply
Price aftertrade
Pricebeforetrade
A
Consumer surplusbefore trade
B
C
Producer surplusbefore trade
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Priceof Steel
0 Quantityof Steel
Worldprice
Domesticdemand
How Free Trade Affect Welfare in
an Exporting Country...
Domesticsupply
Price aftertrade
Pricebeforetrade
A
Consumer surplusafter trade
C
B
Producer surplusafter trade
D
Exports
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Changes in Welfare from Free Trade:
The Case of an Eporting Countr!
The area " sho#s the increase in total surplus
and represents the gains from trade$
Before Trade After Trade Can!e
Consumer Surplus A " B A # B
Producer Surplus C B " C " D " $B " D%
Total Surplus A " B " C A " B " C " D " D
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%o# Free Trade Affects Welfare in
an Eporting Countr!
%he analysis o an exporting country yields
two conclusions#
)omestic producers o the good are
better o, and domestic consumers o
the good are worse o$
%rade raises the economic well+being
o the nation as a whole$
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International Trade and the
Importing Countr!
I the world price o steel is lowerthan the domestic price, the
country will be an importer o
steel when trade is permitted$
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International Trade and the
Importing Countr!
)omestic consumers will want to buysteel at the lower world price$
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International Trade and the
Importing Countr!
)omestic producers o steel willha!e to lower their output because
the domestic price mo!es to the
world price$
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International Trade and the
Importing Country...Price
of Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
World
Price
Price after
trade
Domesticquantity
demanded
Domesticquantity
supplied
Price beforetrade
&mports
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How Free Trade Affect Welfare in
an Importing Country...Price
of Steel
0 Quantityof Steel
Domesticsupply
World
Price
Domesticdemand
Price after
trade
Price beforetrade
A
B
C
D
&mports
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How Free Trade Affect Welfare in
an Importing Country...Price
of Steel
0 Quantityof Steel
Domesticsupply
World
Price
Domesticdemand
Price after
trade
Price beforetrade
A
Consumer surplusbefore trade
C
B
Producer surplusbefore trade
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How Free Trade Affect Welfare in
an Importing Country...Price
of Steel
0 Quantityof Steel
Domesticsupply
World
Price
Domesticdemand
Price after
trade
Price beforetrade
A
Consumer surplusafter trade
B D
CProducer surplus
after trade
&mports
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Changes in Welfare from Free Trade:
The Case of an Importing Countr!
The area " sho#s the increase in total surplus
and represents the gains from trade$
Before Trade After Trade Can!e
Consumer Surplus A A " B " D " $B " D%
Producer Surplus B " C C # B
Total Surplus A " B " C A " B " C " D " D
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%o# Free Trade Affects Welfare in
an Importing Countr!%he analysis o an importing country yields
two conclusions#
)omestic producers o the good are worse
o, and domestic consumers o the good are
better o$
%rade raises the economic well+being o the
nation as a whole because the gains o
consumers exceed the losses o producers$
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The &ains and 'osses from
Free International Trade
%he gains o the
winners exceed the
losses o the losers$ %he net change in
total surplus is
positi!e$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Tariffs
%arisare taxes on imported goods$
%arisraise the price o imported
goods abo!e the world price by the
amount o the tari$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Price 'ittari(
Worldprice
Price'itout
tari(
The Effect of a Tariff...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Tari(
Q)S Q)
D
&mports 'itout tari(
&mports'ittari(
Q*DQ*
S
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effect of a Tariff...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Worldprice
Q)S Q)
D
Price'itout
tari(
&mports 'itout tari(
Consumer surplusbefore tari(
roducer surplusbefore tari(
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effect of a Tariff...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Tari( Worldprice
Q)S Q*
S Q*D Q)
D
Price'itout
tari(
Price 'ittari(
&mports 'itout tari(
&mports'ittari(
A
Consumer surplus'it tari(
B
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effect of a Tariff...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Tari( Worldprice
Q)S Q*
S Q*D Q)
D
&mports 'itout tari(
&mports'ittari(
C+
roducer surplusbefore tari(
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effect of a Tariff...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Tari( Worldprice
Q)S Q*
S Q*D Q)
D
&mports 'itout tari(
&mports'ittari(
E
Tari( re,enue
Price 'ittari(
Price'itout
tari(
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effect of a Tariff...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Tari( Worldprice
Q)S Q*
S Q*D Q)
D
Price'itout
tari(
Price 'ittari(
&mports 'itout tari(
&mports'ittari(
A
B
C E+
D -
Dead'ei!t loss
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Changes in Welfare from a Tariff
eore %ari "ter %ari Change
Consumer -urplus "..C.)./. " . + C.)./.
3roducer -urplus 4 C . 4 . C
4o!ernment (e!enue
'one / . /
%otal -urplus "..C.)./..4 ".. C. /. 4 + ) .
The area "(F sho#s the fall in total surplus and
represents the dead#eight lossof the tariff$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effects of a Tariff
" tari reduces the 5uantity o imports
and mo!es the domestic mar&et closer
to its e5uilibrium without trade$ With a tari, total surplus in the
mar&et decreases by an amount
reerred to as a deadweight loss$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effects of an
Import )uota
"n import 5uotais a limiton the 5uantity o imports$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Price 'itquota
Worldprice
Price'itout
quota
The Effect of an Import !uota ...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Q)S Q*
S Q*D
&mports 'itout quota
&mports'it
quota
Domestic
supply"
&mportSupply
Quota
Equilibrium 'itquota
Equilibrium'itouttrade
Q)D
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effects of an
Import )uota
ecause the 5uota raises the domestic price
abo!e the world price, domestic buyers o
the good are worse o, and domestic sellerso the good are better o$
6icense holders are better o because they
ma&e a proit rom buying at the world
price and selling at the higher domestic
price$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effect of an Import !uota ...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Worldprice
Q)S Q*
S Q*D Q)
D
Price'itout
quota
Price 'itquota
&mports 'itout quota
&mports'it
quota
Domestic
supply"
&mportSupply
QuotaA
B
C E. E.. -+
D
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Changes in Welfare from an
Import )uota
A"B"C"D"E/"E"-"+ A"B"C"E/"E"+
The area "(F sho#s the fall in total surplus and
represents the dead#eight lossof the quota$
Before Quota After Tari( Can!e
Consumer Surplus
Producer Surplus+o,ernment1e,enue
Total Surplus
A"B"C"D"E/"E"- A"B #$C"D"E/"E"-%
+ C"+ "C
2one E/"E "$E/"E%
# $D"-%
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effects of an
Import )uota
With a 5uota, total surplus in the
mar&et decreases by an amount
reerred to as a deadweight loss$ %he 5uota can potentially cause an e!en
larger deadweight loss, i a mechanism
such as lobbying is employed to allocatethe import licenses$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Effects of Tariffs and
)uotas
I go!ernment sells import licenses or
ull !alue, re!enue e5uals that o
e5ui!alent tari and the results o
taris and 5uotas are identical$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
*oth tariffs and import quotas $ $ $
raise domestic prices$
reduce the welare o domestic
consumers$
increase the welare o domestic
producers$
cause deadweight losses$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
+ther *enefits of International
Trade
Increased !ariety o goods
6ower costs through economies oscale
Increased competition
/nhanced low o ideas
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Arguments for ,estricting
Trade
7obs
'ational -ecurity Inant Industry
8nair Competition
3rotection as a argaining
Chip
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Trade Agreements
8nilateral# when a country remo!es its
trade restrictions on its own$
9ultilateral#a country reduces its traderestrictions while other countries do the
same$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
-AFTA%he 'orth "merican ree %rade "greement
'"%"is an example o a multilateral tradeagreement$
In 1::;, '"%" lowered the trade barriers
among the 8$-$, 9exico, and Canada$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
&ATT
%he 4eneral "greement on %aris and %rade
4"%%reers to a continuing series o
negotiations among many o the world
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
.ummar!
%he eects o ree trade can be determinedby comparing the domestic price without
trade to the world price$
" low domestic price indicates that thecountry has a comparati!e ad!antage in
producing the good and that the country will
become an exporter$
" high domestic price indicates that the rest
o the world has a comparati!e ad!antage in
producing the good and that the country will
become an importer$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
.ummar!
When a country allows trade and
becomes an exporter o a good,
producers o the good are better o, and
consumers o the good are worse o$ When a country allows trade and
becomes an importer o a good,
consumers o the good are better o, andproducers are worse o$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
.ummar!
" tari @ a tax on imports @ mo!es a
mar&et closer to the e5uilibrium
than would exist without trade, and
thereore reduces the gains rom
trade$
Import 5uotas will ha!e eectssimilar to those o taris$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
.ummar!
%here are !arious arguments or
restricting trade# protecting *obs,
deending national security, helping
inant industries, pre!enting unaircompetition, and responding to oreign
trade restrictions$
/conomists, howe!er, belie!e that ree
trade is usually the better policy$
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
4raphical(e!iew
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Equilibrium Without Trade...
Priceof Steel
EquilibriumPrice
0 Quantityof Steel
Equilibriumquantity
Domestic
supply
Domesticdemand
Producer
surplus
Consumersurplus
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
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International Trade in an
Exporting Country...
Priceof Steel
0 Quantityof Steel
Domesticdemand
Domesticsupply
Worldprice
Price aftertrade
Exports
Domesticquantity
demanded
Domesticquantitysupplied
Pricebeforetrade
d f
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
How Free Trade AfectsWelare in an Exporting
Country...Priceof Steel
0 Quantityof Steel
Worldprice
Domesticdemand
Domesticsupply
Price aftertrade
Pricebeforetrade
A
B
C
D
Export
s
H F T d Af
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
How Free Trade AfectsWelare in an Exporting
Country...Priceof Steel
0 Quantityof Steel
Worldprice
Domesticdemand
Domesticsupply
Price aftertrade
Pricebeforetrade
A
Consumer surplusbefore trade
B
C
Producer surplusbefore trade
H F T d Af t
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
How Free Trade AfectsWelare in an Exporting
Country...Priceof Steel
0 Quantityof Steel
Worldprice
Domesticdemand
Domesticsupply
Price aftertrade
Pricebeforetrade
A
Consumer surplusafter trade
C
B
Producer surplusafter trade
D
Export
s
I t ti l T d d th
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
International Trade and theImporting Country...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
WorldPrice
Price after
trade
Domesticquantity
demanded
Domesticquantity
supplied
Price beforetrade
&mports
H F T d Af t
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
How Free Trade AfectsWelare in an Importing
Country...Priceof Steel
0 Quantityof Steel
Domesticsupply
WorldPrice
Domesticdemand
Price after
trade
Price beforetrade
A
B
C
D
&mports
H F T d Af t
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
How Free Trade AfectsWelare in an Importing
Country...Priceof Steel
0 Quantityof Steel
Domesticsupply
WorldPrice
Domesticdemand
Price after
trade
Price beforetrade
A
Consumer surplusbefore trade
C
B
Producer surplusbefore trade
H F T d Af t
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
How Free Trade AfectsWelare in an Importing
Country...Priceof Steel
0 Quantityof Steel
Domesticsupply
WorldPrice
Domesticdemand
Price after
trade
Price beforetrade
A
Consumer surplusafter trade
B D
CProducer surplus
after trade
&mports
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Efects o a Tarif...
Price 'ittari(
Worldprice
Price'itout
tari(
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Tari(
Q)S Q)
D
&mports 'itout tari(
&mports'ittari(
Q*DQ*
S
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Efects o a Tarif...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Worldprice
Q)S Q)
D
Price'itout
tari(
&mports 'itout tari(
Consumer surplusbefore tari(
roducer surplusbefore tari(
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Efects o a Tarif...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Tari( Worldprice
Q)S Q*
S Q*D Q)
D
Price'itout
tari(
Price 'ittari(
&mports 'itout tari(
&mports'ittari(
A
Consumer surplus'it tari(
B
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Efects o a Tarif...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Tari( Worldprice
Q)S Q*
S Q*D Q)
D
&mports 'itout tari(
&mports'ittari(
C+
roducer surplusbefore tari(
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Efects o a Tarif...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Tari( Worldprice
Q)S Q*
S Q*D Q)
D
&mports 'itout tari(
&mports'ittari(
E
Tari( re,enue
Price 'ittari(
Price'itout
tari(
-
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Efects o a Tarif...
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Tari( Worldprice
Q)S Q*
S Q*D Q)
D
Price'itout
tari(
Price 'ittari(
&mports 'itout tari(
&mports'ittari(
A
B
C E+
D -
Dead'ei!t loss
The Efects o an Import
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The Efects o an Importuota ...
Price 'itquota
Worldprice
Price'itout
quota
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Q)S Q*
S Q*D
&mports 'itout quota
&mports'it
quota
Domestic
supply"
&mportSupply
Quota
Equilibrium 'it
quota
Equilibrium'itout
trade
Q)D
The Efects o an Import
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The Efects o an Importuota ...
Price
of Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Worldprice
Q)S Q*
S Q*D Q)
D
Price'itout
quota
Price 'itquota
&mports'it
quota
Domestic
supply"
&mportSupply
QuotaA
B
C E.
E.. -+
D