A.S 3.2

International Trade

International Trade• Involves buying and selling goods and services

between nations

• Most trade occurs between firms operating in different countries.

• Some trade is between government agencies

International Trade• Can you think of exports and imports NZ sells and

buys?

• Which countries do you think most of NZ’s trade occurs between?

• How much influence do you think NZ has on the price in the world market?

• http://business.newzealand.com/Economy/15264.aspx

International Trade• NZ is a price taker

– A price taker must accept or take the price that is set in the world market.

• Whether a good is imported or exported depends on where the World price is, in relation to the Domestic product.

• World price= the price at which a good or service is traded on international markets

• Domestic Price= The price at which a good or service is traded on home market.

HORIZONTAL WORLD SUPPLY CURVE

• New Zealand faces a perfectly elastic supply curve for imports set at the world price as the New Zealand market is so small in relation to the output from the world

• Therefore the overseas suppliers are able to supply as much as New Zealand can buy at the world market price

Exports• An export is a product consumed in one

country and sold to and consumed in another country.

• Reasons for exports occurring• The World price is higher than the domestic price

would be if there was no trade• The World provides a larger market than the

domestic market. • When these reasons occur, trade results in larger

revenues for firms than if trade didn’t occur.

New Zealand as a exporter

World Price

Exports

QD NZ

QS NZ

World Demand curve

New Zealand as a exporter

Amount of Exports

Imports

• An import is a product consumed by one country but produced in another country

• Reasons why imports occur• The world price is lower than what the domestic

price would be than if there was no trade• The importing country may not have the resources

to produce the imported product.• Imports enable the standard of living of a nation to

be greater than it would otherwise be.

New Zealand as an Importer

World Price

QDnzQSnz

Imports

World supply curve

New Zealand as an Importer

Trade and Allocative Efficiency

• Trade improves allocative efficiency• Shown by increased net welfare benefit

from both exporting and importing

• Protectionist policies result in a loss of allocative efficiency and dead weight loss

• Tariff is a type of protectionist policy. It is a tax on an imported good.

Trade and Allocative Efficiency - Tariffs

World price (Zero tariff)

QDnzQSnz

World Price (Tariff)

QDnz’QSnz’

a

c

QDnzQDnz’QSnz’

Trade and Allocative Efficiency - Tariffs

Consumer surplus

Imports

Tariff Revenue

Trade and Allocative Efficiency - Tariffs• Tariff on imports

• Increase the price• More government revenue• Reduce consumer surplus• Increase producer surplus• Create a dead weight loss• Create allocative inefficiency

• Domestic producers do benefit but consumers and the economy as a whole suffers a net loss

• Protectionist policies that restrict access of New Zealand exports

IMPORT QUOTA

Price

Quantity

Sd

Dd

P

Pquota

QUOTA

Qquota

An import quota will increase prices.

Reduce CS

Increase PS

Create allocative inefficiency

CS

PS

DWL