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Module 16 krugman 1
Module 16
Supply, Demand, and International Trade
What’s New in the Fourth Edition?
• Updated cases
• Handouts to use in class
Module Objectives
• Who gains and who loses from international trade?
• How do tariffs and quotas affect economic surplus?
• What are the arguments for and against trade protection policies?
Teaching Tips
Imports, Exports, and Wages
Creating Student Interest
• Ask students to give examples of products that are associated with a specific country (wine and
France, clothing and China, diamonds and South Africa, United States and food, Switzerland and
watches). Why do they think we buy goods from these other countries rather than producing them
Presenting the Material
• To explain the impact of imports on domestic supply and demand, guide students through the
logical steps that follow. Assuming that the world price is below the domestic price, ask:
o What do imports do to the domestic supply of auto parts? (The domestic supply
decreases but the total supply increases.)
o What does the lower price of auto parts do to domestic producers’ incentive to
o What does the lower price of auto parts do to the quantity demanded by domestic
• To explain the impact of exports on domestic supply and demand, guide students through the logical
steps provided. Assuming that the world price is higher than the domestic price, ask:
o What does a higher domestic price do to the quantity consumed domestically?
Module 16 krugman 2
• Use Handout 16-1 to provide an example.
• After discussing the effect of trade on the export-and import-competing industries, you may wish to
The Effects of Trade Protection
Creating Student Interest
• Have students brainstorm reasons why a country (or a group within a country) might want to impose
a tariff.
• Students are often unaware of the tariffs that are imposed by the United States and other countries.
Presenting the Material
• Before illustrating the impact of a tariff with a supply and demand graph, ask students to track the
impact of a tariff. Assume that the world price of steel is lower than the domestic price of steel.
A tariff will:
o Decrease the quantity of imported steel.
o Raise the domestic price of the steel.
The Political Economy of Trade Protection
Creating Student Interest
Presenting the Material
• Discuss the rationale for trade protection and talk about the weaknesses of each of these arguments.
Arguments for protection
Module 16 krugman 3
Arguments for protection
Problems with protectionist arguments
1. National security. The United States does not
want to depend on an import that is necessary
for national defense.
Some industries, such as sugar, have argued for
protection based on national security grounds,
a clearly spurious argument.
2. Job creation. The United States wants to limit
the number of jobs lost to trade.
Jobs lost in import-competing industries are
offset by job gains in export-competing
Module Outline
I. Supply, Demand, and International Trade
A. The effects of imports
1. In autarky, the equilibrium in a market is determined by the intersection of the domestic
demand and domestic supply curves.
2. As a result of imports, domestic consumers gain and domestic producers lose, but the
gain to consumers exceeds the loss to producers. This is illustrated in text Figure 16-3,
shown here.
3. Note that although a country as a whole gains from trade, some groups lose.
Figure 16-3
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B. The effects of exports
1. Exports also lead to an overall gain in total surplus for the exporting country.
2. As a result of exports, domestic consumers lose and domestic producers gain, but the
gain to producers exceeds the loss to consumers. This is illustrated in text Figure 16-5,
shown next.
C. International trade and wages
1. International trade tends to raise the prices of factors that are abundantly available and
reduce the prices of factors that are scarce.
Figure 16-5
2. U.S. exports tend to be human-capital-intensive and U.S. imports tend to be unskilled-
labor-intensive. This suggests that international trade raises the wage rate of highly
III. The Effects of Trade Protection
A. The effects of a tariff
1. In the past, tariffs were an important source of government revenue because they were
relatively easy to collect.
2. Today, tariffs are usually intended to discourage imports and protect import-competing
domestic producers.
3. Tariffs raise both the price received by domestic producers and the price paid by
domestic consumers.
Module 16 krugman 5
B. The effects of an import quota
1. Import quotas are similar to tariffs, except that the money that would otherwise have
been government revenue becomes quota rents to license holders.
IV. The Political Economy of Trade Protection
A. Arguments for trade protection
1. There are three common arguments for trade protection.
a. National security: Overseas sources of crucial goods such as oil are vulnerable to
disruption, so a country should be self-sufficient in these goods.
b. Job creation: Import-competing industries create jobs.
c. Infant industry argument: New industries need a temporary period of trade
protection to become established.
B. The politics of trade protection
1. Much trade protection has little to do with these arguments.
2. Trade protection usually reflects the political influence of import-competing producers.
3. Producers are usually a smaller and more cohesive body than the consumers who lose
from trade restrictions. Thus, producers wield more political influence.
C. International trade agreements and the World Trade Organization
1. Trade protection hurts domestic consumers and foreign export industries. Therefore,
countries care about each other’s trade policies.
D. New challenges to globalization
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1. Inequality—there is concern that globalization is leading to more wage inequality in the
United States.
2. Outsourcing
a. Concerns about income distribution and outsourcing have led to an antiglobalization
movement.
Case Studies in the Text
Economics in Action
Trade Protection in the United States—This EIA explains that the United States generally follows a policy
of free trade, with the exception of agricultural products.
Ask students the following questions:
1. Which agricultural products are subject to the greatest trade restrictions? (Ethanol and
dairy.)
2. Do trade restrictions impose a large cost on the U.S. economy? (No, the average tariff
level and the overall costs to the economy have both fallen sharply in the last 20 years.)
Business Case
Li & Fung: From Guangzhou to You—This business case discusses Li & Fung, an export broker that
brings together manufacturers in Hong Kong and foreign buyers. Li & Fung will help the foreign buyer
design the product, find the lowest-cost way to manufacture it, and then order it on the foreign buyer’s
behalf.
Web Resources
The following website provides information related to international trade.
Module 16 krugman 7
Handout 16-1
Date_________ Name____________________________ Class________ Professor________________
Imported Sweets?
Assume that the world price of sugar is lower than the domestic price of sugar and that there are no
barriers to trade. What will happen to consumers and producers of sugar in the domestic market?
Caribbean countries have a comparative advantage in the production of sugar, yet the United States
blocks their imports. What are the impacts of the quota on sugar on consumers and producers in the
United States?
How would doing away with sugar quotas help poor countries?
Module 16 krugman 8
Answers:
Assume that the world price of sugar is lower than the domestic price of sugar and that there are no
barriers to trade. What will happen to consumers and producers of sugar in the domestic market?
Caribbean countries have a comparative advantage in the production of sugar, yet the United States
blocks their imports. What are the impacts of the quota on sugar on consumers and producers in the
United States?
How would doing away with sugar quotas help poor countries?
