Lecture Notes: Chapter 7 – Global Markets in Action
Based on Microeconomics: Canada in the Global Environment (11th Edition)
Introduction
International trade is a cornerstone of the global economy. It allows countries to specialize, gain
from comparative advantage, access larger markets, and enjoy a greater variety of goods. But
trade is not without controversy—some industries benefit while others lose, prompting calls for
restrictions. In this chapter, we explore how markets work with international trade, identify the
gains from trade, examine the effects of trade barriers, and critically evaluate arguments for
restricting trade. Real-world examples and supply and demand logic help clarify these concepts
and the economic consequences of trade policy.
1. How Markets Work with International Trade
When nations engage in international trade, domestic markets become linked to global
markets. Prices and quantities in domestic markets are influenced by world prices.
Autarky vs. Open Market
In autarky (no trade), a country relies entirely on domestic production.
In an open market, countries import goods if world prices are lower and export goods if
world prices are higher.
Example:
Canada may import bananas because it is too costly to produce them domestically, and export
lumber due to abundant forests and competitive pricing.
Export and Import Markets
Graph Description – Import Market:
X-axis: Quantity of the good
Y-axis: Price
Domestic supply and demand curves intersect at domestic equilibrium.
When the world price is lower than domestic price, the horizontal world price line
lies below equilibrium, and the gap between domestic demand and domestic supply
is filled by imports.
Graph Description – Export Market:
, If the world price is higher than the domestic price, domestic producers export the
surplus as consumers buy less at the higher price, but producers increase output.
Example:
If Canada opens to trade in steel and world steel prices are lower than domestic prices, Canadian
steel consumers import the cheaper global steel, and domestic producers scale back.
2. Gains from International Trade: Who Wins and Who Loses
Gains from Trade
The key economic rationale for trade is that it increases total surplus—the sum of consumer
and producer surplus.
1. Consumers Benefit from Lower Prices and More Choice
o Imports lower domestic prices, increasing consumer surplus.
o Example: Electronics or clothing from Asia are cheaper due to lower production
costs.
2. Producers Benefit by Accessing Larger Markets
o Exporters earn more by selling to high-demand international markets.
o Example: Canadian wheat and timber find strong demand in Asia and the U.S.
3. Increased Efficiency Through Specialization
o Countries focus on producing goods for which they have a comparative
advantage, allowing greater overall production.
Losers from Trade
Despite total gains, not everyone benefits:
Domestic producers in importing industries face lower prices and competition, leading
to job losses.
Workers in declining industries may suffer long-term wage suppression or
unemployment.
Producers in exporting countries may face sudden demand shocks due to global price
shifts.
Example:
Opening trade in textiles can benefit consumers with lower prices, but domestic textile workers
may lose jobs to cheaper international production.
3. Effects of International Trade Barriers
Based on Microeconomics: Canada in the Global Environment (11th Edition)
Introduction
International trade is a cornerstone of the global economy. It allows countries to specialize, gain
from comparative advantage, access larger markets, and enjoy a greater variety of goods. But
trade is not without controversy—some industries benefit while others lose, prompting calls for
restrictions. In this chapter, we explore how markets work with international trade, identify the
gains from trade, examine the effects of trade barriers, and critically evaluate arguments for
restricting trade. Real-world examples and supply and demand logic help clarify these concepts
and the economic consequences of trade policy.
1. How Markets Work with International Trade
When nations engage in international trade, domestic markets become linked to global
markets. Prices and quantities in domestic markets are influenced by world prices.
Autarky vs. Open Market
In autarky (no trade), a country relies entirely on domestic production.
In an open market, countries import goods if world prices are lower and export goods if
world prices are higher.
Example:
Canada may import bananas because it is too costly to produce them domestically, and export
lumber due to abundant forests and competitive pricing.
Export and Import Markets
Graph Description – Import Market:
X-axis: Quantity of the good
Y-axis: Price
Domestic supply and demand curves intersect at domestic equilibrium.
When the world price is lower than domestic price, the horizontal world price line
lies below equilibrium, and the gap between domestic demand and domestic supply
is filled by imports.
Graph Description – Export Market:
, If the world price is higher than the domestic price, domestic producers export the
surplus as consumers buy less at the higher price, but producers increase output.
Example:
If Canada opens to trade in steel and world steel prices are lower than domestic prices, Canadian
steel consumers import the cheaper global steel, and domestic producers scale back.
2. Gains from International Trade: Who Wins and Who Loses
Gains from Trade
The key economic rationale for trade is that it increases total surplus—the sum of consumer
and producer surplus.
1. Consumers Benefit from Lower Prices and More Choice
o Imports lower domestic prices, increasing consumer surplus.
o Example: Electronics or clothing from Asia are cheaper due to lower production
costs.
2. Producers Benefit by Accessing Larger Markets
o Exporters earn more by selling to high-demand international markets.
o Example: Canadian wheat and timber find strong demand in Asia and the U.S.
3. Increased Efficiency Through Specialization
o Countries focus on producing goods for which they have a comparative
advantage, allowing greater overall production.
Losers from Trade
Despite total gains, not everyone benefits:
Domestic producers in importing industries face lower prices and competition, leading
to job losses.
Workers in declining industries may suffer long-term wage suppression or
unemployment.
Producers in exporting countries may face sudden demand shocks due to global price
shifts.
Example:
Opening trade in textiles can benefit consumers with lower prices, but domestic textile workers
may lose jobs to cheaper international production.
3. Effects of International Trade Barriers
