Free trade allows countries to specialize in goods where they have a comparative advantage. If a country's domestic price is below the world price, it will export that good. If the domestic price is above the world price, it will import that good. Free trade benefits consumers in importing countries and producers in exporting countries, while harming producers in importing countries and consumers in exporting countries. However, the overall gains from trade exceed the losses. Tariffs and import quotas reduce these gains by creating deadweight losses and moving prices away from the free trade equilibrium. While restrictions are sometimes advocated for reasons like protecting jobs, most economists argue that free trade generally provides net benefits.

1. 9 Application: International Trade

6. Figure 1The Equilibrium without International Trade Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Consumer surplus Producer surplus Domestic supply Domestic demand Equilibrium price Equilibrium quantity

12. Figure 2 International Trade in an Exporting Country Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Domestic supply Price after trade World price Domestic demand Exports Price before trade Domestic quantity demanded Domestic quantity supplied

13. Figure 3 How Free Trade Affects Welfare in an Exporting Country Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel D C B A Domestic supply Price after trade World price Domestic demand Exports Price before trade

14. Figure 3 How Free Trade Affects Welfare in an Exporting Country Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel D C B A Domestic supply Price after trade World price Domestic demand Exports Price before trade Producer surplus before trade Consumer surplus before trade

15. How Free Trade Affects Welfare in an Exporting Country

18. Figure 4 International Trade in an Importing Country Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Price after trade World price Domestic supply Domestic demand Imports Domestic quantity supplied Domestic quantity demanded Price before trade

19. Figure 5 How Free Trade Affects Welfare in an Importing Country Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel C B D A Domestic supply Domestic demand Price after trade World price Imports Price before trade

20. Figure 5 How Free Trade Affects Welfare in an Importing Country Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel C B A Domestic supply Domestic demand Price after trade World price Price before trade Consumer surplus before trade Producer surplus before trade

21. Figure 5 How Free Trade Affects Welfare in an Importing Country Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel C B D A Domestic supply Domestic demand Price after trade World price Imports Price before trade Producer surplus after trade Consumer surplus after trade

22. How Free Trade Affects Welfare in an Importing Country

26. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Tariff Domestic supply Domestic demand Price with tariff Imports without tariff Equilibrium without trade Price without tariff World price Imports with tariff Q S Q S Q D Q D

27. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Domestic supply Domestic demand Imports without tariff Equilibrium without trade Price without tariff World price Q S Q D Producer surplus before tariff Consumer surplus before tariff

28. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Tariff A B Domestic supply Domestic demand Price with tariff Imports without tariff Equilibrium without trade Price without tariff World price Imports with tariff Q S Q S Q D Q D Consumer surplus with tariff

29. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Tariff C G Domestic supply Domestic demand Price with tariff Imports without tariff Equilibrium without trade Price without tariff World price Q S Imports with tariff Q S Q D Q D Producer surplus after tariff

30. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Tariff World price E Domestic supply Domestic demand Price with tariff Imports without tariff Price without tariff Q S Imports with tariff Q S Q D Q D Tariff Revenue

31. Figure 6 The Effects of a Tariff Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Tariff World price C G A E D F B Domestic supply Domestic demand Price with tariff Imports without tariff Price without tariff Imports with tariff Q S Q S Q D Q D Deadweight Loss

32. The Effects of a Tariff

35. Figure 7 The Effects of an Import Quota Copyright © 2004 South-Western Price of Steel 0 Quantity of Steel Quota Domestic supply Domestic supply + Import supply Domestic demand Isolandian price with quota Imports without quota Equilibrium with quota Equilibrium without trade Imports with quota Q D World price World price Price without quota = Q S Q D Q S

37. Figure 7 The Effects of an Import Quota Copyright © 2004 South-Western E" Price of Steel 0 Quantity of Steel Quota A E' C B G D F Domestic supply Domestic supply + Import supply Domestic demand Isolandian price with quota Imports without quota Equilibrium with quota Equilibrium without trade Imports with quota Q D World price World price Price without quota = Q S Q D Q S

38. The Effects of an Import Quota