Most common way to measure international trade: ratio to GDP

Trade balance= total value of exports – total value of imports

 Trade surplus: more exports
 Trade deficit: more imports

Trade theories:
1) Size and distance between markets determine how much countries buy and sell
2) Differences in labor, physical capital, natural resources, and tech create prouctive
advantages
3) Economies of scale create productive advantage

Gravity model
- The size of an economy is directly related to the volume of imports and exports
 Larger economies produce more goods and services so they more to export
 They generate more income from exports so people can buy more improts

Ricardian Model: differences in labor productivity between countries => differences in

production => to gains from trade
 Results: a country that produces a good with less input has an absolute advantage

Heckscher-Ohlin model: Trade can be explained by differences in resources/factors of

production
 Countries have a relative abundance of factors of production

Theorem:
- An economy is predicted to be relatively efficient at producing goods that are
intensive in its abundant factors of production =>
- An economy is predicted to export goods that are intensive in their abundant factors
of production and import goods that are intensive in their scarce factors of
production.
 Developing countries tend to export simpler, low-skilled laborintensive products such
as clothing.
 The US, the EU, and Japan export more sophisticated, high-skillintensive goods such
as chemicals and technology.

Tariffs

Specific tariff: fixed charge per unit of imported goods

Ad valorem tariff: fraction of the value of the imported good (e.g: 25%)
Usage of tariff
 Source of gov revenue
 Security
 Fight against trading partner
 Political strategy

Effects of tariffs on price and volume

 - If sellers are less willing to ship the product bc of tariffs => excess demand in the
country imposing the tariff
 Price rise domestically (less supply)
 Price falls abroad (more supply)
 Volume of trade declines domestically
Cost of tariff:
 Negative impact on consumers
 Hurt producers who use the good as input
Benefits of tariff
 Benefit domestic producers of that good
 The gov (taxpayers) gains tax revenue from a tariff

Developing countries
 rely on tariffs to fund their gov => high % of gov revenue
 translate into higher prices => tax burden falls harder and low-income consumers

Export subsidy
- specific subsidy: payment per unit exported
- ad valorem subsidy: payment % of the value exported

 lowers the price to sell abroad for producers => increase export for the good =>
domestic supply decrease => higher domestic prices
 increase supply in the imported county => lower prices in importing country =>
exported good cheaper for foreign buyers

Elimination of export subsidies

- winners:
 current agricultural exporters in developing countries (brazil, china)
 taxpayers and consumers in the country where the subsidy is provided
- losers
 farmer in advanced countries
 food-importing countries (poor countries)

Import quotas:
 makes producer/license holders better off
 make consumers worse off
 no effect on gov revenue

When quota is applied => increase in quality

When quota is removed => increase in quantity

International Trade: Each country acting individually would be better off choosing
protectionism, but both would be better off if both chose free trade => prisoners dilemma