Reading notes--Principles of Economics (chapter9)

Summary

Chapter 9 is Application: International Trade. This chapter compares total surplus before and after trade. It also introduces tariff and the change of total surplus after tariff.

Total surplus before and after trade

• Both exporting and importing countries can gain more total surplus.
• For exporting countries, the domestic consumer surplus decreases and producer surplus increases. But the gain is greater than loss.
• For importing countries, the domestic producer surplus decreases and consumer surplus increases. But the gain is greater than loss.

Tariff and deadweight loss

• Tariff is a tax on import.
• Tariff has no effect for a exporting country.
• D and F in this diagram represent the deadweight loss from the tariff.

Definitions

1. World price– the price of a good that prevails in the world market for that good

2. Tariff– a tax on goods produced abroad and sold domestically

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1.The nation of Openia allows free trade and exports steel. If steel exports were prohibited, the price of steel in Openia would be_____, benefiting steel_____(Correct answer: B)

a. higher; consumers

b. lower; consumers

c. higher; producers

d. lower; producers

My wrong answer: C

2.When a nation opens itself to trade in a good and becomes an importer,_____(Correct answer: A)

a. producer surplus decreases, but consumer surplus and total surplus both increase

b. producer surplus decreases, consumer surplus increases, and so the impact on total surplus is ambiguous

c. producer surplus and total surplus increase, but consumer surplus decreases

d. producer surplus, consumer surplus, and total surplus all increase

My wrong answer: C