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Unit 2

2.9 International Trade and Public Policy

2 min readnovember 15, 2020

Jeanne Stansak


AP Microeconomics 💵

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Unit 2: Supply and Demand

2.9: International Trade and Public Policy

International trade allows all countries around the world to expand their markets and makes goods and services available to their population that might not be available domestically. International trade increases the variety of goods and services available to the population while creating a sense of competition, which in turn lowers prices for consumers. Public policy is just simply the laws and regulations that govern economic activity. There are many trade agreements in place to govern international trade, such as NAFTA (North American Free Trade Agreement) and ASEAN (Association of Southeast Asian Nations). For example, in the United States, our largest trading partners are China, Canada, and Mexico. We participate in international trade because it is cheaper for us to trade for the goods than to produce them domestically (i.e. shoes, clothing, electronics).

Quotas

A quota is a government-imposed limit on production levels. This means that it limits the amount of a particular good that can come into a country from somewhere else. Quotas are used as a trade barrier in an effort to protect the domestic industries that produce similar goods.
On the graph below, we see what a graph of a tariff looks at. The green triangle is consumer surplus, the yellow shaded area is producer surplus and the orange triangle is deadweight loss. P_E and Q_E​ are the equilibrium price and quantity, respectively, before the quota. Q_Q is the quota limit on how much of the good can come into the country. P_Q is the price of the good when the quota is in effect.
https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-Z73ktVqrsKp3.png?alt=media&token=b31c3128-89a6-4377-a9ab-d236cadcbe08

Tariffs

Tariffs are simply a tax on a foreign good coming into a country. There are levied in an effort to reduce the amount of a particular good coming into a country by raising the price of the good.
The graphs that deal with tariffs and international trade are used to show what market price is before any international trade (closed borders), market price when there are no restrictions on trade (open borders), and market price when there are tariffs placed by the government to control the importation of certain goods and services.
https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-0pLk3Cn5PsPF.png?alt=media&token=bc31ddc6-842f-44e9-8f49-49f95350c93f
On the AP Exam they sometimes will ask you to identify consumer and producer surplus under certain conditions or the change in consumer surplus and producer surplus.
Some examples:
https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-LTZKTlgVn0PL.png?alt=media&token=03bddf11-298c-4384-aa12-f29fed0c8e6f

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