International Trade Can Significantly Affect Domestic Market

International Trade Can Have Big Effects On Domestic Markets For Both

International trade can have big effects on domestic markets. For both an import good and an export good, describe how opening up to international trade affects supply or demand for the particular good, the competitiveness of that good’s market, and how the change in competitiveness affects equilibrium price and quantity. Additionally, describe how opening up to trade specifically affects a domestic monopoly, and explain, using game theory, how even a single additional competitor can lead to a market outcome similar to perfect competition. The journal must be at least three pages in length, include at least three peer-reviewed resources, and adhere to APA style with proper citations and references.

Paper For Above instruction

International trade exerts profound influences on domestic markets, shaping supply and demand dynamics, market competitiveness, and equilibrium prices and quantities. These effects are complex and differ depending on whether a country imports or exports a particular good. Understanding these impacts requires a detailed analysis of market mechanisms and theoretical frameworks, such as game theory, especially concerning monopolistic markets and the entry of new competitors.

Effects of International Trade on Import Goods

When a country opens up to international trade regarding an import good, the primary effect is an increase in the supply of that good within the domestic market. This increased supply results from cheaper or more efficiently produced imports flooding into the market, often driven by lower production costs abroad. For consumers, this translates into greater availability and a reduction in the price of the imported good. The augmented supply shifts the domestic supply curve outward, leading to a lower equilibrium price and a higher equilibrium quantity. Consequently, consumer surplus increases, but domestic producers of similar goods may experience decreased competitiveness, potentially leading to reductions in production or market exit.

From a supply-demand perspective, the increased availability of cheaper imported goods shifts the supply curve rightward, resulting in a new, lower equilibrium price and greater quantity consumed domestically (Krugman et al., 2018). This situation benefits consumers through lower prices and increased variety but may harm domestic producers unable to compete with the lower-cost imports. The competitiveness of the domestic market diminishes as imports increase, potentially leading to industry consolidation or decline if domestic firms cannot adapt.

Effects of International Trade on Export Goods

In contrast, when a country opens up to international trade for an export good, the primary effect is an increase in demand from foreign markets. Foreign consumers and businesses become willing to purchase more of the good at existing prices or higher prices due to increased market access. This boost in demand shifts the domestic demand curve outward, typically resulting in a higher equilibrium price and increased quantity sold domestically and internationally. Domestic producers benefit from expanded markets and higher prices, incentivizing increased production and potentially technological improvements to meet foreign demand (Samuelson & Nordhaus, 2010).

The increased demand enhances the competitiveness of the export good's market, attracting investment and encouraging innovation. Economically, this can lead to higher national income, increased employment in export sectors, and overall economic growth. However, the higher prices might also price out some domestic consumers, leading to debates over the distribution of trade benefits versus costs (Rodrik, 2018).

Impact of Trade on Domestic Monopoly Markets

Opening to international trade significantly affects domestic monopolies. In a monopolistic market, the sole producer exercises considerable market power, setting prices above marginal costs to maximize profit. When international trade is introduced, the monopoly faces increased competitive pressure. External competition can erode the monopoly's market power, potentially transforming it into an effective competitive market environment.

Game theory provides insights into this shift. A monopoly confronted with a new competitor enters a strategic game where each player anticipates the other's actions. The classic Cournot model demonstrates that even a single additional competitor can lead to a significant reduction in market power, aligning the outcome closer to perfect competition (Tirole, 1988). As the number of competitors increases, the market outcome approaches the equilibrium of perfectly competitive markets: prices decrease, and output increases. This is because each firm recognizes that aggressive pricing strategies or increased output can attract market share, incentivizing a move towards more competitive behavior.

In the real world, this transition can be swift, especially if trade policy reduces barriers and makes foreign markets accessible. The result is reduced market power for the domestic monopoly, lower consumer prices, and increased overall efficiency. Moreover, the threat of entry by new competitors compels the monopoly to operate more efficiently and avoid practices that would inhibit market entry, leading to benefits for consumers and the economy (Porter, 1990).

Conclusion

International trade profoundly influences domestic markets through changes in supply, demand, and market competitiveness. For import goods, trade tends to increase supply and lower prices, benefiting consumers but challenging domestic producers. For export goods, trade boosts demand, raises prices, and encourages production and innovation. In the context of monopolies, opening to trade introduces competitive pressures that can transform a market dominated by a single firm into one resembling perfect competition, as highlighted by game theory models. Overall, trade fosters efficiency, innovation, and consumer choice, yet it presents challenges for domestic industries that must adapt to increased competition.

References

• Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International Economics (11th ed.). Pearson.
• Porter, M. E. (1990). The competitive advantage of nations. Harvard Business Review, 68(2), 73-93.
• Rodrik, D. (2018). Straight Talk on Trade: Ideas for a Sane World Economy. Princeton University Press.
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.
• Tirole, J. (1988). The Theory of Industrial Organization. MIT Press.