Traded Goods

In this situation, the country consumes qd units of the good, of which domestic production satisfies qs and imports supply the difference . As the government bids for goods, domestic demand increases from D1D1 to D2D2. Because the good is an import and the country is a price taker, however, additional imports satisfy additional demand. Imports increase by the amount qd* – qd. The total cost to society of the additional consumption is the area given by the rectangle abqd*qd, and the unit cost by the import price Pi.The relevant price is not necessarily the international price of the good, but the import parity price, that is, the border price adjusted for transport costs. Similar analysis leads to the conclusion that the relevant price for an export good is the export price or export parity price. We obtain

Analysts should use the import or export parity price for tradable goods, even if the country does not trade the goods. The justification for using the import or export parity price as the shadow price of tradable goods is similar to one used for traded goods, discussed in the previous section. In some rare cases the domestic price of a nontraded, but tradable good is below the border price plus the tariff, that is, there is water in the tariff.

In some countries certain goods cannot be traded for various reasons. One of the most common barriers is transport costs. The cost of producing the good domestically is lower than the price of imports plus transport costs. At the same time, the cost of domestic production plus transport costs makes it unprofitable to export, rendering the good nontradable for that particular country. In Zimbabwe, for example, steel might be such a good. Because Zimbabwe is landlocked, domestic production enjoys natural protection, but at the same time exports are unprofitable.