Page 776 - Economics

CONFIRMING PAGES

CHAPTER 35
685
International Trade
imports to Canada (point t in Figure 35.4b ). The Canadian of aluminum at this price. Also at this price the United
import demand curve in that figure shows the Canadian im- States will import 25 million pounds from Canada, indi-
ports that will occur at all world aluminum prices below the cated by the U.S. import demand curve. The $.88 world
$.75 Canadian domestic price. price equates the quantity of imports demanded and the
quantity of exports supplied (25 million pounds). Thus
Equilibrium World Price, there will be world trade of 25 million pounds of alumi-
Exports, and Imports num at $.88 per pound.
Note that after trade, the single $.88 world price will
We now have the tools for determining the equilibrium prevail in both Canada and the United States. Only one
world price of aluminum and the equilibrium world levels price for a standardized commodity can persist in a highly
of exports and imports when the world is opened to trade. competitive world market. With trade, all consumers can
Figure 35.5 combines the U.S. export supply curve and im- buy a pound of aluminum for $.88, and all producers can
port demand curve in Figure 35.3b and the Canadian ex- sell it for that price. This world price means that Canadians
port supply curve and import demand curve in Figure 35.4b . will pay more for aluminum with trade ($.88) than without
The two U.S. curves proceed rightward from the $1 U.S. it ($.75). The increased Canadian output caused by trade
domestic price; the two Canadian curves proceed rightward raises Canadian per-unit production costs and therefore
from the $.75 Canadian domestic price. raises the price of aluminum in Canada. The United States,
International equilibrium occurs in however, pays less for aluminum with trade ($.88) than
this two-nation model where one nation’s without it ($1). The U.S. gain comes from Canada’s com-
import demand curve intersects another parative cost advantage in producing aluminum.
nation’s export supply curve. In this case Why would Canada willingly send 25 million pounds
the U.S. import demand curve intersects of its aluminum output to the United States for U.S. con-
Canada’s export supply curve at e . There,
W 35.2 sumption? After all, producing this output uses up scarce
the world price of aluminum is $.88. The
Equilibrium world Canadian resources and drives up the price of aluminum
price, exports, and Canadian export supply curve indicates for Canadians. Canadians are willing to export aluminum
imports that Canada will export 25 million pounds to the United States because Canadians gain the means—
the U.S. dollars—to import other goods, say, computer
FIGURE 35.5 Equilibrium world price and quantity of software, from the United States. Canadian exports enable
exports and imports. In a two-nation world, the equilibrium world Canadians to acquire imports that have greater value to
price ( $.88) is determined by the intersection of one nation’s export supply Canadians than the exported aluminum. Canadian exports
curve and the other nation’s import demand curve. This intersection also
decides the equilibrium volume of exports and imports. Here, Canada exports to the United States finance Canadian imports from the
25 million pounds of aluminum to the United States. United States. (Key Question 6)

U.S. export
supply QUICK REVIEW 35.2

• A nation will export a particular product if the world price
Price (per pound; U.S. dollars) $1.00 e Equilibrium supply • In a two-country world model, equilibrium world prices and
exceeds the domestic price; it will import the product if the
Canadian
world price is less than the domestic price.
export
equilibrium quantities of exports and imports occur where
one nation’s export supply curve intersects the other nation’s
import demand curve.
.88
.75

U.S. import Trade Barriers
demand No matter how compelling the case for free trade, barriers
Canadian import to free trade do exist. Let’s expand Chapter 5’s discussion
demand
of trade barriers.
0 25 Excise taxes on imported goods are called tariffs; they
Quantity of aluminum (millions of pounds) may be imposed to obtain revenue or to protect domestic

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