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Price: increase from PW to PW + Tariff
Domestic demand: decrease from Q2 to Q4

Price

Domestic supply: increase from Q1 to Q3

SD

Imports: Decrease from Q1Q2 to Q3Q4
Domestic producer revenue: increase from a
to a + b + e + f + g + l

j
PW + Tariff
PW

SW + Tariff

f

e
l

h

g
b

i

c

d

Foreign producer revenue: decrease from
b + c + d to just c

SW

k

Government revenue: h
Consumer surplus: decrease from
j + e + f + k + g + h + i to j + k

D

a
Q4

Q3

Q1

Q2

Producer surplus: increase from l to
l+e+f

Quantity

DWL: g + i
Tariff disadvantages
Price

But

SD

PW + Tariff

SW + Tariff
B

PW

A

C

SW

1
...
Production inefficiency
3
...
Regressive – hurts those with low
incomes more than those with high
incomes
Evaluation  elasticity of demand and supply

D

Q1

Q3

Q4

Q2

Quantity



If demand and supply are both inelastic
for various reasons, the quantity fall in
imports will be quite small

Import quota
Price







SD quota

PW + Quota
A B

PW

SW

Infant industry
Dumping
Domestic employment
Low cost labour
Improve current account position




SD

A = DWL in world efficiency
B = DWL in consumer surplus

D
Q1 Q3

Q4

Q2

Quantity
Price: Increase from PW to PW + Quota

Price

SD

Domestic demand: Decrease from Q2 to Q4

SD quota

Domestic supply: Increase from Q1 +Q3Q4
Imports:

PW + Quota
PW

e

a

f

h i j

g
b

c

Q1 Q3

SW

Foreign producer revenue: b + c +d to b + f + g  whether it is
an increase or a decrease depends on the figures on the axes

D

d
Q4

Domestic producer revenue: increase from a to
a+e+c+h+i

Q2

DWL: i + j

Quantity

Trade subsidy
Price

SD

P1
PW + subsidy
PW

A

Infant industry
Dumping
Domestic employment
Improve current account position
The subsidy gives suppliers a higher price
– they get the price paid by consumers plus the subsidy



A = DWL of efficiency – more resources used than
would have been if world suppliers had supplied this
quantity

SW
D

Q1 Q3







SD

Q2

Quantity

Price

SD

SD + subsidy

Price: unchanged
Domestic demand: unchanged
Domestic supply: increase from Q1 to Q2
Imports: Decrease from Q1Q2 to Q3Q2

P1
e

d

Domestic producer revenue: increase from
a to a + b + d + e + f

g
f

PW

Foreign producer revenue: decrease from
b + c to just c

SW

b

a

D

c

Government cost: d +e + f
DWL: f

Q1

Q3

Q2

Quantity

Economic integration
Economic integration – process whereby countries coordinate to reduce trade barriers and to
harmonise monetary and fiscal policy
Trading bloc – a group of countries that join together and agree to increase trade barriers between
themselves
Bilateral/multilateral trade agreement – agreement to reduce tariffs and quotas between 2/multiple
countries
1
...
Countries come together to reduce tariffs and/or quotas, but only on certain goods and
services e
...
between E
...
Free trade area
a
...
g
...
Customs union
a
...
g
...
U
4
...
Customs union with complete free movement of labour and capital e
...
E
...
Economic monetary union
a
...
g
...
Full economic integration
a
...
g
...
g
...
U – features
1
...
Common external trade barriers (tariffs/quotas) on imports from non-member countries
3
...
Agriculture
b
...
Competition
d
...
Environmental
4
...
Co-ordination of economic policy
6
...
U pros and cons
Benefits of E
...
Free trade
a
...
Higher GDP per capita
c
...
Increase in FDI – all benefits of FDI
a
...
g
...
More jobs created etc…
3
...
Contributions to the E
...
Free movement of labour and capital
Drawbacks of E
...
Forced to follow E
...
Some regulations are detrimental to business as increase cost of production e
...

environmental regulations
2
...
U budget
3
...
U
4
...
Risk that if not controlled, can have negative effects on the economy

Trade creation
Theory that derives from a country’s membership of a customs union
...

E
...
UK joins the E
...




PUK + Tariff

A = gain in world efficiency
B = gain in consumer surplus

SUK + Tariff
A

B

SUK

PUK
D

Q3

Q1

Q2

Q4

Quantity
Trade diversion

Theory that derives from a country’s entry into a customs union
...

e
...
If UK is trading with Thailand but then joins the E
...


Price
SUK

PThai + Tariff

SThai + Tariff
SE
...
U producers
have a higher comparative
advantage, but because the tariff the
UK has to impose after joining the
E
...



DUK


Q3

Q1

Q2

Q4

Quantity

A = loss of domestic
efficiency
B = loss of E
...
g
...
Non-fluctuating exchange rate
a
...
Lower cost of currency conversion
3
...
Greater investment if currency is stable
b
...
Currency more stable against speculation
5
...
Loss of monetary policy autonomy
a
...
No potential for countries to alter their exchange rates
a
...
Cost of currency conversion very high
4
...
If nations within the union go bankrupt, this could destabilise the entire union
Globalisation
 Process in which national economies have become increasingly integrated and inter dependent
Causes: Trade liberalisation, Trading blocs, Growth of MNCs, Technological advancement, Mobility of
labour & capital
Pros
1
...
As nations have become more integrates, there is a much bigger market – more
international competition
i
...
Consumers benefit from greater consumer surplus, greater welfare, greater
market size, market access, in terms of more choice and quality of goods and
services, more innovative products being developed, more technology etc…
iii
...
Benefits of trade
a
...
WTO
3
...
As market size gets bigger, then you can expect firms to grow in size – hire more
workers
4
...
As market size gets bigger, firms can exploit that size, increase their output and lower
their cost as a result, which leads them to benefit from higher profits, which can be
reinvested etc…
5
...
Workers can move freely
b
...
Massive benefits of FDI for a nation
i
...
Increased employment
iii
...
Technological transfers and innovations
Cons
1
...
Issue of higher incomes not translating into higher incomes for all, but rather just for the
elites
2
...
There is a risk that as you become more integrated, you struggle to compete
3
...
Trade imbalances
5
...
As countries become one, a crisis or a shock that happens in one country can spread
around the world – other nations are susceptible to shocks
6
...
Same kinds of goods and services and MNCs
b
...

When there is an improvement in terms of trade (TOT increases) – implies that the price of the basket of
exports can buy more in terms of imports than it could before
E
...
if TOT goes from 100 in year 1 to 102 in year 2, the basket of exports can buy 2% more imports than
it could the year before
...
g
...

For this to happen, either:




Price of basket of exports has decreased
Price of basket of imports has increased
Or both

Changes in TOT – Short Run
1
...
Relative inflation rates
a
...
Exchange rate movements
Changes in TOT – Long Run
1
...
Productivity
3
...
Improved productivity and or technology = lower cost of production so lower price of
exports – improves their competitiveness

Average
export
price

But
SD

1
...
Quantities of X and M
3
...
 Current account
b
...
If the PED of net
exports is greater than 1, then export revenues will fall, which will be detrimental to the
economy
...
Thus, even though this may lead to lower export prices
(deteriorating TOT), it may lead to greater export revenues, which may improve the economic
situation in the country

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