Bài giảng International Economics - Chapter 4: Why Nations Trade: A Partial Equilibrium View

Why Nations Trade: A Partial Equilibrium View Nothing is accomplished until someone sells something. (popular business saying)The Goals of this ChapterIntroduce a two-country partial equilibrium model of international trade. Use the partial equilibrium model to illustrate how consumers and producers are affected by international trade.Use the partial equilibrium model to analyze the effects of exchange rate changes, changes in demand, and transportation costs. Introduce international marketing and show how it complements comparative advantage by helping to determine the value of products that are traded internationally.Explain how the need for international marketing introduces a fixed cost to international trade that tends to prevent the smooth adjustments predicted by the standard international trade models.Measuring the Welfare Gains from Exchange:Producer Surplus and Consumer SurplusProducer surplus: The net gains to producers of a product, equal to the total revenue minus the sum of marginal (variable) costs. Consumer surplus: The net gains for consumers of a product, equal to the sum of all marginal gains minus the market price paid for the products. Equilibrium price = $6Equilibrium quantity = 50Equilibrium price = $6*Equilibrium quantity = 50Producer surplus = $125 ($5x50 = $250/2 = $125)Equilibrium price = $6Equilibrium quantity = 50Producer surplus = $125 ($5x50/2 = $250/2 = $125)Consumer surplus = $75 (3x50/2 = $150/2 = $75)Equilibrium price = $6Equilibrium quantity = 50Producer surplus = ($5x50)/2 = $250/2 = $125Consumer surplus = $75 ($3x50)/2 = $150/2 = $75Total gains from exchange equals consumer surplus plus producer surplus Gains from exchange = ($8x50)/2 = $400/2 = $200 The Two-Country Partial equilibrium ModelThe textbook emphasizes two-country models in order to remind you that what happens in one country affects markets in other countries.Partial equilibrium models assume “all other things remain equal” in other markets, obviously an unrealistic assumption.But, a two-country partial equilibrium model can isolate how, all other things equal, a change in a market in one country affects the market for the same product in another country.Specifically, the two-country partial equilibrium model lets us estimate the changes in consumer and producer surplus in the two countries.The Welfare Gains from TradeHeartland producers gain surplus. Heartland consumers lose surplus.Orient producers lose surplus. Orient consumers gain surplus.Worldwide, net welfare gains from trade in corn are the sum of the net gains in Heartland and in Orient.Summarizing the Welfare Gains and Losses in Both CountriesHeartland producers gain B+C = $41.25Heartland consumers lose B = –$33.75Heartland’s net welfare gain = C = $7.50Orient’s producers lose b = –$30.00Orient’s consumers gain b+c = $45.00Orient’s net welfare gain = c = $15.00Applying the Two-Country Partial Equilibrium ModelNow that you understand the two-country partial equilibrium model and how to calculate the welfare gains from international exchange, you are ready to apply the model.One interesting case is to examine the welfare effects of an increase in foreign demand for a product.Specifically, suppose that in a certain market, demand increases in the foreign country that currently imports the good.The Net Gains from Trade Increase in Both Countries after the Rise in Demand in Orient An increase in foreign demand raises the price of corn in both countries.Producers in Heartland gain welfare.Consumers in Orient gain welfare.The net gains from exchange increase in both countries.Applying the Two-Country Partial Equilibrium ModelAnother case, discussed in Case Study 4.2 in the textbook, is to analyze the welfare effects in a given product market after a change in the exchange rate.Suppose that the exchange rate of $1.00 = 5 euros changes to $1.00 = 8 euros, which constitutes and appreciation of the dollar.Suppose also that the United States is the exporting country in a certain market.The International Market for Hoses after the Dollar Appreciation The net gain from trade for Europe declines to the area b.The volume of The net gain from trade for the United States declines to area a.trade declines from 0f to 0g. Overall, in this market the gains from trade decline.Analyzing the Effect of Transport Costs on International TradeThe partial equilibrium model can be used to analyze how transport costs affect international trade.Transport costs in effect drive a wedge in between the price received by an exporter and the price paid by a foreign importer.Transport costs increase the cost of products to the final user, and it should not be surprising that they reduce both the volume of trade and the gains from trade. The analysis of transport costs uses the concepts of consumer and producer surplus.Consumer surplus is equal to the area AProducer surplus is equal to the area BThe net gains from exchange are equal to the areas A + BTransport costs of $40 raise the effective international supply curve from S to ST.Transport costs drive a “wedge” between what suppliers receive and consumers pay.The volume of trade falls from 40 to 20.Producer surplus is reduced to area b.Consumer surplus is reduced to area a.Decreasing transport costs increase trade.The international supply curve shifts down to ST2.The equilibrium price falls to $60.The gains from trade rise from a + b to a + b + c + d. Trade and Transport CostsAn increase in transport costs reduces the gains from trade for both the importing and exporting countries.A decline in transport costs increases the gains from trade.Most of the increase in trade during the past two centuries is due to improvements in the efficiency of transportation.The Effect of Trade on Price CompetitionThe partial equilibrium model is also useful for analyzing the gains from trade under imperfect competition.International trade increases the number of potential suppliers, which tends to increase price competition.Increased price competition reduces monopoly profit and deadweight losses.The effect of increased competition can be visualized by comparing consumer and producer surplus under imperfect competition and under perfect competition. Imperfectly competitive firms face a downward-sloping demand curve D.Profit-maximizing firms equate marginal revenue equal marginal cost.Prices exceed marginal cost.The quantity supplied, q, is less than the quantity, Q, that would be supplied under perfect competition.Total welfare is reduced by the “deadweight” loss, which is equals to area D.When firms face the horizontal demand curve in a competitive global market, price declines from p to P. Consumption shifts from c to C.The competitive market eliminates the deadweight loss.International Trade and International MarketingThe term comparative advantage is seldom used by international exporters and importers.Instead, marketers are concerned about competitive advantage, which refers to a firm’s advantage in providing its customers or potential customers with value.Value is the net sum of a product’s perceived benefits, such as quality, convenience, and prestige, relative to its price.Specifically, we define a product’s value, V, as V = B/P, where B and P are the product’s benefits and price, respectively.