International Trade drawing worksheet
The answer key prints on its own page, so hand out everything before it.
International Trade drawing worksheet · problem 1 of 3
The small country of Verranth imports steel, buying at the going price on international markets, which sits below the price that would clear the Verranth market with no trade. To protect domestic mills, the government of Verranth begins collecting a charge of five dollars on every ton of steel brought in from abroad. Show the effect of this policy on the market for steel in Verranth, assuming all else is held constant.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
International Trade drawing worksheet · problem 2 of 3
The small country of Ostvale imports wheat at the going international market price, which is below the price that would clear the Ostvale market with no trade. A record growing season across the major wheat-exporting nations leaves the world crop far larger than usual, while Ostvale's own harvest is normal. Show the effect of this change on the market for wheat in Ostvale, assuming all else is held constant.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
International Trade drawing worksheet · problem 3 of 3
Larenne is a small country that imports coffee at the going international market price, which sits below the price that would clear the Larenne market with no trade. Rapid growth abroad raises household incomes across the rest of the world, coffee is a normal good for those households, and incomes inside Larenne are unchanged. Show the effect of this change on the market for coffee in Larenne, assuming all else is held constant.
Draw the initial equilibrium, show the change, and label every curve and both axes. Mark the new equilibrium.
Explain your reasoning:
International Trade drawing worksheet: answer key
1. Steel Import Duty: tariff shifts right
Verranth is a price taker, so before the policy both domestic buyers and domestic sellers face the world price, and the gap between the quantity demanded and the quantity supplied at that price is filled by imports. The charge is a per-unit tariff on each imported ton, so the price inside Verranth becomes the world price plus the tariff, and the tariff moves up from zero. The world price is set by the rest of the world and is unchanged, and nothing has altered domestic production costs, incomes, or tastes, so both domestic curves stay exactly where they are.
The price inside Verranth rises by the amount of the tariff, domestic production increases, domestic quantity demanded falls, and imports shrink. The government collects tariff revenue equal to the tariff times the remaining imports, and two deadweight loss triangles appear, one from higher-cost domestic output and one from purchases buyers give up.
Watch for: Many students shift domestic supply to the right, reasoning that protection means home mills produce more. Home mills do produce more, but that is a movement up along an unchanged supply curve, pulled out by the higher price the policy creates. A tariff changes the price line that domestic buyers and sellers face; it does not cut any mill's costs, so the supply curve itself never moves.
2. Global Wheat Glut: worldPrice shifts left
A bumper harvest abroad adds to world supply, and Ostvale is far too small to influence what wheat trades for, so it simply faces a cheaper world market: the world price line moves down. Ostvale's own growing conditions, input costs, household incomes, and tastes are all untouched, so neither the domestic supply curve nor the domestic demand curve moves.
At the lower world price domestic quantity demanded rises and domestic quantity supplied falls, so imports widen. Consumer surplus in Ostvale increases and producer surplus falls, and because consumers gain more than producers lose, total surplus in Ostvale rises.
Watch for: Students often shift domestic supply to the right, since the extra wheat is real enough. The harvest happened in other countries, so it changes the price Ostvale faces rather than what Ostvale's own farmers can grow at each price. Domestic farmers slide down their unchanged supply curve, and the only thing that moves is the world price line, which moves down.
3. World Incomes and Coffee: worldPrice shifts right
Richer households abroad buy more coffee, a normal good, so world demand grows and coffee trades for more on world markets. Larenne is too small to affect that price, so on its graph the world price line moves up, closer to the no-trade domestic equilibrium price. Incomes, tastes, and production costs inside Larenne are unchanged, so neither the domestic demand curve nor the domestic supply curve moves.
As the world price line moves up, domestic quantity supplied increases and domestic quantity demanded falls, so imports narrow. Larenne's consumers pay more and lose surplus while its producers gain surplus, and if the world price ever reached the no-trade equilibrium price, imports would disappear.
Watch for: The word "incomes" pulls many students into shifting Larenne's domestic demand curve to the right. The incomes that rose belong to consumers in other countries, and those consumers buy in the world market, not on this graph. Their extra buying reaches Larenne only through the price it must pay, so the world price moves up and Larenne's own buyers slide up an unchanged demand curve.