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The first issue our economists take up is whether Isoland is likely to become a steel importer or a steel exporter. In other words if free trade is allowed will Isolandian end up buying or selling steel in world markets.  To answer this question the economists compare the current Isolandian price of steel to the price of steel in other countries. We call the price prevailing in world markets the world price. If the world price of steel is higher than the domestic price then Isoland will export steel once trade is permitted. Isolandian steel producers will be eager to receive the higher prices available abroad and will start selling their steel to buyers in other countries. Conversely if the world price of steel is lower than the domestic price then Isoland will import steel. Because foreign sellers offer a better price Isoland steel consumer will quickly start buying steel from other countries.  In essence comparing the world price and the domestic price befor...

Consider the market for steel. The steel market’s is well suited to examining the gains and losses from international trade: Steel is made in many countries around the world and there is much world trade in steel. Moreover the steel market is one in which policymakers often consider and sometimes implement trade restrictions to protect domestic steel producers from foreign competitors. We examine here the steel market in the imaginary country of Isoland. The Equilibrium without Trade As our story begins the Isolandian steel is isolated from the rest of the world. By government decree no one in Isoland is allowed to import or export steel and the penalty for violating the decree is so large that one dares try.  Because there is no international trade the market for steel in Isoland consists solely of Isolandian buyers and sellers. As the domestic price adjusts to balance the quantity supplied by domestic sellers and the quantity demanded by domestic   buye...

If you check the labels on the clothes are now wearing you will probably find that some of your clothes were made in another country. A century ago the textiles and clothing industry was a major part of the U.S. economy but that is no longer the case. Faced with foregn competitors that can produce quality goods at low cost many U.S firms have found it increasingly difficult to produce and sell textiles and clothing at a profit. As a result they have laid off their workers and shut down their factories. Today much of the textiles and clothing that Americans consume are imported. The story of the textiles industry raises important questions for economic policy. How does international trade affect economic well-being? Who gains and who loses from free trade among countries and how do the gains compare to the losses. Introdiced the study of international trade by applying the principle of comparative advantage. According to this principle all countries can benefit from t...

One day in 1974 economists Arthur Laffer sat in a Washington restaurant with some prominent journalists and politicians. He took out a napkin and drew a figure on it to show how tax rates affect tax revenue. It looked much like. Laffer then suggested the United Staes was on the downward-sloping side of this curve. Tax rates were so high he argued that reducing them would actually raise tax revenue.  Most economists were skeptical of Laffer’s   suggestion. The idea that a cut in tax rates could raise tax revenue was correct as a matter of economic theory but there was more doubt about whether it would do so in practice. There was little evidence for Laffer’s view that U. S. tax rates had in fact reached such extreme levels.  Nonetheless the laffer curve (as it became known) captured the imagination of Ronald Reagan. David Stockman budget director in the first Reagan administration offers the following   story. When Reagan ran for president in 198...