International Economics Diagrams
Posted by bjyechan7 on January 18, 2011
Tariff:
By initiating free trade, China and U.S. markets will be able to get rid of the deadweight loss from the tariffs. Deadweight losses are costs that are caused by inefficient industries spending their resources inefficiently, and these costs are often passed on to the consumers. As China and U.S. initiate FTA, the prices of products will decrease from Pu.s. + tariff to Pu.s.. Subsequently, the deadweight losses caused by inefficient industries are eliminated, getting rid of the burden off the consumers’ hands.
Appreciation:
The U.S. is trying to appreciate the Chinese Yuan buy demanding more of Chinese products. China has been manipulating currency to keep the value of Yuan low, in order to make Chinese firms have an easier time against foreign competition. The appreciation of this Chinese currency will make U.S. firms have an easier time competing against Chinese firms.
Free Trade:
As EU and Korea get rid of the tariffs, there will be benefits for the consumers for several reasons. The Europeans will gain in chemicals, pharmaceutical, electronics, alcoholic beverages, and agricultural sectors. In other words, this means that the Europeans are efficient in these sectors and they have the ability to supply at the price of Pworld, which is way cheaper compared to how Korean industries are supplying at Pdomestic. Therefore, the Korean consumers benefit from a fall in price from Pdomestic to Pworld in these sectors. Also, the quantity demanded from the Korean consumers will increase from Q1 to Q2 due to its decreased price. So the consumers who could not buy the products from Q1 to Q2 now benefit from the EU-Korea FTA by the decrease in the price of the products. However, this will be especially bad for the Korean industries in these sectors. As it is illustrated in the diagram, their share of the market decreases from Qdomestic to Q1 due to the EU-Korea FTA.
Subsidy:
When the government gives a subsidy to domestic producers, the domestic supply curve shifts downwards from S1 to S2. S2 represents the domestic supply with the addition of the subsidy. The price to consumers remains the same but imports will fall while domestic production will increase. Though the overall quantity supplied does not increase in terms of world supply, the ratio of imports to domestic changes.
Aggregate Demand:
Aggregate demand could be increased by many factors. First of all, reduction in taxation could increase the consumption. Secondly, the reduction in interest rates will most likely shun away consumers to save their money but spend them. Also, due to the low interest rate, there will be less burden to borrow money. Therefore, this would both increase the consumption and the corporate investment. Thirdly, increase in government spending would increase the aggregate demand because it is one of the factors that comprises of the aggregate demand. The governmental spending boosts up the consumption in products and increases the earning/income in the sector. Finally, the improved competitiveness could also increase the aggregate demand as the opportunity cost in production would decrease. In addition, the increase in the competitiveness could also boost up the export, which also increases the aggregate demand.
Aggregate Supply:
Increase in the aggregate supply from AS1 to AS2 increases real output from Q1 to Q2 but decrease the price level from P1 to P2. This is desirable as the price level is decrease and the real output has increased. Increase in the aggregate supply could be caused by many factors. First of all, reduction in indirect taxation could lead to increase in the aggregate supply. As the taxation is reduced from the price of the product, the producer could manufacture products at much lower opportunity cost and gain price advantage. Secondly, the reduction in wages of the employees would lead to cut in the production cost and therefore gain price competitiveness. This way, the manufacturer could sell more products at much cheaper price, increasing the aggregate supply. Thirdly, the reduction in price of raw material also leads to the increase in the aggregate supply due to the cut in the production cost. Finally, favorable weather conditions could help industries that depend on the weather to produce more. Therefore, this would also increase the aggregate supply.
Comparative Advantage:
Japan and China are in a comparative advantage to each other. Japan produces more automobiles at QA2 than what China’s producing at QA1. However, China produces more break pads at QB2 than what Japan is producing at QB1. In conclusion, Japan has a comparative advantage in automobiles over China, however, China has a comparative advantage in break pad over Japan. In these countries were to initiate FTA, they would both have loss and gains.
