The graph above shows the demand and supply of socks for the country of Bangladesh

a. If trade is avoided, Bangladesh consumes _____ pairs of socks at a price of _____per socks.

b. With free trade, for a world price of $4 per pair of socks, Bangladesh is producing_____pairs of socks.

c. With free trade, for a world price of $4 per pair of socks, Bangladesh is consuming_______ pairs of socks.

d. With free trade, for a world price of $4 per pair of socks, Bangladesh is importing_________pairs of socks.

e. If the world price is $4 per sock, and the government of Bangladesh imposes a tariff of $1, Bangladesh produces ____________ and imports __________pairs of socks.

f. If the world price is $4 per pair of socks, and the government of Bangladesh imposes a tariff of $1, how much tariff revenue will the Bangladesh government collect? _____ .

Standards of Living

Why are the standards of living for inhabitants of some countries higher than others?

· Are there certain aspects of governmental and economic systems that enable higher or lower benefits to the people?

· Can significant gains be attained via trade between countries?

When we examine economic systems, we look for how efficient individuals, firms, and countries allocate scarce resources. The more competitive, decentralized economic systems will create more efficiency and equity in markets.

· When markets are allowed to operate by engaging in the economic process of producing the goods and services households need and want by making decisions about scarce resources to optimize utility and wealth, opportunity costs will be minimized as a result.

Thus, how stable a government is, how well established a country’s infrastructure is, how much investment is done by a government of their economy, the level of education and skill of a country’s inhabitants, and how significant the private property rights is of those inhabitants of a country will determine the likely standard of living enjoyed by them.

Freer markets and market economies tend to have the highest standards of living, and trade between countries allows more efficient allocation of resources to benefit both countries in quests to raise standards of living.

Core aspects of a market economy are competition and free allocation of resources. Government oversees markets to ensure competition, avoidance of corruption and monopoly formation, and private property rights. Trade helps this process too. Trade encourages more competition and efficient and equitable allocation of resources.

Trade can occur at the individual level when two individuals decide to exchange and trade, at the firm level, or at the country level. When deciding what to trade or whether there is an impetus to trade, comparative advantages are sought.

An individual, firm, or country may have an absolute advantage in producing something, but comparatively upon allocating resources, there can be situations in which trade could benefit both parties and even increase wealth and standard of living.

World Price

As markets get more competitive, equity and efficiency increase. Consumer surplus increases too. Without trade, certain benefits to society may be missed or may not be occurring, while deadweight losses may exist that could be avoided if there were trade.

What does a world price mean? These are some of the issues and questions we will address below.

· Without trade, the domestic firms in a country will be the only ones producing a product.

· But what if a country were able to produce and sell a good at a lower price than the domestics?

· What if, by trading with another country, resources could be allocated elsewhere to do something else so consumer surplus could rise for both the domestic country and foreign country?

That is what happens when the world price from a foreign firm gives impetus for the domestic country to import more of that good rather than produce all on its own. When the world price is less than the domestic price, quantity supplied falls for the domestic producing firms, while quantity demanded rises due to the lower price. Output rises in the market, and consumers enjoy more consumer surplus and options.

But there often is political pressure to reduce or restrict foreign competition to protect the domestic producing industry and retain the market power the domestic producers have. What governments often do to reduce or restrict foreign competition is impose trade restrictions. Import tariffs and import quotas are the two most common ways.

Import tariffs place a tax on foreign goods entering the domestic country. That tax has market implications. The tax raises the price domestically which has to be paid, thereby reducing the quantity demanded and raising quantity supplied. Domestic producers gain some producer surplus, but that producer surplus is taken from consumers from their consumer surplus due to the rise in price. Deadweight losses, which are welfare losses to society, rise due to the tariff, and ultimate quantity output losses occur too.

Similar to the import tariff, import quotas act almost identically to the tariff. The difference with the quota is it is not a tax, but the supply will be affected by the domestic country restricting the quantity coming into the country. By doing that, the supply curve shifts leftward, thereby reducing quantity output in the market and raising price. The government does not collect money in this case as it would with a tariff, however, price inflation, deadweight losses, losses in consumer surplus, and output losses occur the same.