Chapter 2: The Basic Theory Using Demand and Supply

1. Chapter 2: The Basic Theory Using Demand and Supply

2. Key Questions About International Trade • Why do countries trade? What is the basis for trade, especially the product (commodity) composition? • For each country, what are the overall gains (or losses) from trade? • What are the effects of trade on each country’s economic structure? Production, Consumption. • What are the effects of trade on the distribution of income within each country? Winners, Losers.

3. The Basic Theory Using Demand and Supply国际贸易供求分析

4. 2.1 Introduction • Objective To analyze free trade equilibrium and gains from trade.

5. Contents • Demand and supply curves • Consumer and producer surplus • No-trade (Autarky) equilibrium • Free trade equilibrium • Effects of free trade

6. 2.2 Four Questions about Trade • Why do countries trade? What determines the pattern of trade ? • How does trade affect each country’s production and consumption? • How does trade affect the economic well-being of each country? • How does trade affect the distribution of income among various groups within each country?

7. 2.3 Demand and Supply • Demand Curve The relationship between the price charged and the quantity of a good demanded. For a normal good, demand declines when price rises.

9. 2.3 Demand and Supply • Price elasticity of demand Change in quantity demanded (%) e=- Change in price (%) • If e＞1, demand is elastic; • If e＜ 1, demand is inelastic.

10. 2.3 Demand and Supply • Consumer Surplus 消费者剩余 Consumer well-being from the difference between the value of a good and the price paid for it.

11. At $2000/unit Total value (V)= c+t+u Total payment (P)= t+u Consumer surplus = V - P = c At $1000/unit ?

12. 2.3 Demand and Supply • Supply Curve The relationship between the price charged and the quantity of a good supplied.

13. Upward sloping: Increasing marginal cost 边际成本递增

14. 2.3 Demand and Supply • Price elasticity of supply Change in quantity supplied (%) e= Change in price (%) • If e＞1, supply is elastic; • If e＜ 1, supply is inelastic.

15. 2.3 Demand and Supply • Producer Surplus 生产者剩余 Producer well-being from the difference between the revenue received and the cost incurred.

16. At $1000/unit Total Revenue (R)= e+z Total Cost (C)= z Producer surplus = R - C = e At $2000/unit ?

17. 2.4 No-trade Equilibrium National supply = National Demand

18. Consumer surplus= c Producer surplus= h c=h ?

19. 2.5 Free Trade Equilibrium • A two-country world • Home country: USA • Foreign country: The rest of the world

20. No-trade Equilibrium: A

21. No-trade equilibrium: H

22. 2.5 Free Trade Equilibrium • Price Change and Trade • Rest of the world: Exporter Price Production Consumption Export = Production - Consumption

24. 2.5 Free Trade Equilibrium • Price Change and Trade • USA: Importer Price Production Consumption Import = Consumption - Production

26. Free Trade Equilibrium Foreign Exports = US Imports

28. Free Trade Equilibrium • Foreign Exports = US Imports = 50 thousand units • Price = $1000/unit

30. Free Trade Equilibrium What if world price is above or below $1000/unit ?

31. Free Trade Equilibrium 800 Gap

32. 2.6 Effects of Free Trade • Effects in the importing country • Effects on consumers • Effects on producers • Effects on the whole country

33. Producer surplus: - a Consumer surplus: + (a+b+d ) Net national gains: b+d One dollar, one vote metric

34. 2.6 Effects of Free Trade • Effects in the exporting country • Effects on consumers • Effects on producers • Effects on the whole country

35. Producer surplus: + (j+k+n) Consumer surplus: - (j+k) Net national gains: +n

36. 2.6 Effects of Free Trade • Which country gains more? Both countries gain from free trade, but the gains may be unequal.

37. Which country gains more?

38. Comparing (b+d) andn The side with less elastic trade curve gains more. n: exporter’s surplus b+d: importer’s surplus

39. 2.7 Summary • A product will be exported from countries where its price was lower without trade to countries where its price was higher. • Trade affects production and consumption in both countries. In the exporting country, production rises while consumption falls. The opposite is true for the importing country.

40. Summary • Both countries gain from free trade. The country with a less elastic trade curve or a larger price change gains more. • Within the trading countries, gainers are producers of exportable products and consumers of imported products; losers are producers of import-competing products and consumers of exportable products.