2. Absolute advantage
“The producer that requires a smaller quantity of inputs to
produce a good is said to have an absolute advantage in
producing that good.”
– N. Gregory Mankiw,
Principles of Economics
Monday, 27 February, 12
3. Comparative advantage
“The producer who gives up less of other goods to produce [a
particular good] has the smaller opportunity cost of
producing [that particular good] and is said to have a
comparative advantage in producing it.”
– N. Gregory Mankiw,
Principles of Economics
Monday, 27 February, 12
4. What do these countries have in
common?
✤ China ✤ India
✤ Morocco ✤ Turkey
✤ Sri Lanka ✤ Bangladesh
✤ Colombia ✤ Cambodia
✤ Lesotho ✤ Mexico
Monday, 27 February, 12
5. And the answer is....
✤ All ten countries supply
clothing to U.S. discount
clothing retailer Old Navy
✤ Old Navy sources its products
from around 50 countries
Photo: Boone NC Magazine
✤ Men’s T-shirt for US$3.99
✤ Old Navy sold US$1.62 billion
in merchandise in 4Q 2011
Sources: Gap Inc. 10-Q filing, Old Navy Web site
Monday, 27 February, 12
7. Effects of trade on an exporting
country
Domestic
Price of Supply
Textiles
Price before
Trade
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
8. Effects of trade on an exporting
country
Domestic
Price of Supply
Textiles
Consumer
Surplus
Price before
Trade
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
9. Effects of trade on an exporting
country
Domestic
Price of Supply
Textiles
Price before
Trade
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
10. Effects of trade on an exporting
country
Domestic
Price of Supply
Textiles Exports
Price after
Trade
Price before
Trade
{ World
Price
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
11. Effects of trade on an exporting
country
Domestic
Price of Supply
Textiles Exports
Price after
Trade
Price before
Trade
{ World
Price
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
12. Effects of trade on an importing
country
Domestic
Price of Supply
Textiles
Price before
Trade
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
13. Effects of trade on an importing
country
Domestic
Price of Supply
Textiles
Consumer
Surplus
Price before
Trade
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
14. Effects of trade on an importing
country
Domestic
Price of Supply
Textiles
Price before
Trade
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
15. Effects of trade on an importing
country
Domestic
Price of Supply
Textiles
Price before
Trade
World
Price after
Trade
{
Imports
Price
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
16. Effects of trade on an importing
country
Domestic
Price of Supply
Textiles
Consumer
Surplus
Price before
Trade
World
Price after
Trade
{ Imports
Price
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
17. Free trade: winners
✤ Domestic consumers in importing countries
✤ Domestic producers in exporting countries
Monday, 27 February, 12
18. Free trade: losers
✤ Domestic consumers in exporting countries
✤ Domestic producers in importing countries
Monday, 27 February, 12
19. Other benefits of trade
✤ Overall economic well-being increases
✤ But not for everyone
✤ Variety of available goods increases
✤ Increased competition
✤ Enhanced flow of ideas
Monday, 27 February, 12
20. Arguments against trade
✤ Eliminates jobs
✤ Endangers national security
✤ Harms developing industries
✤ Unfair competition (dumping)
Monday, 27 February, 12
24. Trade subsidies
✤ The U.S. paid domestic farmers $245.2 billion in subsidies from
1995-2009, including $15.4 billion in 2009
✤ 10% of farmers received 74% of subsidies
✤ Corn subsidies totaled $73.8 billion (1995-2009)
✤ The E.U.’s Common Agricultural Policy costs €55 billion per year, or
around 40% of the total E.U. budget
Sources: Environmental Working Group, European Union
Monday, 27 February, 12
25. Trade barriers: the less obvious
✤ “Quality” requirements
✤ Health concerns
✤ Packaging
✤ Labeling
✤ Other product standards
✤ Dense bureaucracy
Monday, 27 February, 12
26. Effects of a tariff
Domestic
Price of Supply
Textiles
Consumer
Price without Surplus
Trade
World Price
}
Producer
Surplus Domestic
Imports Demand
Quantity of
Textiles
Monday, 27 February, 12
27. Effects of a tariff
Domestic
Price of Supply
Textiles
Price without
Trade
World Price
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
28. Effects of a tariff
Domestic
Price of Supply
Textiles
Price without
Trade
Price after
Tariff
{
Imports
Tariff
World Price
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
29. Effects of a tariff
Domestic
Price of Supply
Textiles
Consumer
Surplus
Price without
Trade
Price after
Tariff
{ Imports
Tariff
World Price
Domestic
Demand
Quantity of
Textiles
Monday, 27 February, 12
30. Effects of a tariff
Domestic
Price of Supply
Textiles
Consumer
Surplus
Price without
Trade
Price after
Tariff
{ Imports
Tariff
World Price
Domestic
Demand
Producer Quantity of
Surplus Textiles
Monday, 27 February, 12
31. Trade: a zero-sum game
✤ One country’s trade surplus is another country’s trade deficit
✤ If China exports a T-shirt to the U.S., the value of that T-shirt is
counted as a credit (addition) to China’s trade balance and as a debit
(subtraction) to the U.S. trade balance
Monday, 27 February, 12
32. Balance of Payments
✤ While GDP reports a country’s output of goods & services, a Balance
of Payments (BOP) statement records a country’s cross-border
transactions, both current account transactions and capital
transactions
✤ The two sides of a BOP statement must always balance
✤ A deficit in the current account must be matched by an equivalent
surplus in the capital account
✤ In other words, a country that runs a $1 billion current account
deficit must finance it by attracting $1 billion in capital
Monday, 27 February, 12
33. Structure of a BOP statement
✤ Current Account
✤ Balance on trade in goods (Exports - Imports)
✤ Balance on trade in services
✤ Net income & net unilateral transfers
✤ Capital & Financial Account
✤ Errors & Omissions
Monday, 27 February, 12
34. BOP: Current Account
✤ Debits (subtractions) ✤ Credits (additions)
✤ Imports ✤ Exports
✤ Income payments ✤ Income receipts
✤ Increase in reserves ✤ Decrease in reserves
✤ All are uses of foreign ✤ All are sources of foreign
exchange exchange
Monday, 27 February, 12
35. Bureau of Economic Analysis
U.S. International Transactions Accounts Data
Table Creation Date: December 15, 2009 Release Date: December 16, 2009
Table 1. U.S. International Transactions
[Millions of dollars]
(Credits +; debits -)/1/ 2008 2008
Current account
Exports of goods and services and income receipts 2591233 Imports of goods and services and income payments -3168938
Exports of goods and services 1826596 Imports of goods and services -2522532
Goods, balance of payments basis/2/ 1276994 Goods, balance of payments basis/2/ -2117245
Services/3/ 549602 Services/3/ -405287
Transfers under U.S. military agency sales contracts/4/ 22571 Direct defense expenditures -36452
Travel 110090 Travel -79743
Passenger fares 31623 Passenger fares -32597
Other transportation 58945 Other transportation -72143
Royalties and license fees/5/ 91599 Royalties and license fees/5/ -26616
Other private services/5/ 233529 Other private services/5/ -153267
U.S. government miscellaneous services 1245 U.S. government miscellaneous services -4469
Income receipts 764637 Income payments -646406
Income receipts on U.S.-owned assets abroad 761593 Income payments on foreign-owned assets in the United States -636043
Direct investment receipts 370747 Direct investment payments -120862
Other private receipts 385940 Other private payments -349871
U.S. government receipts 4906 U.S. government payments -165310
Compensation of employees 3044 Compensation of employees -10364
Unilateral current transfers, net -128363
U.S. government grants/4/ -36003
U.S. government pensions and other transfers -8390
Private remittances and other transfers/6/ -83970
Memoranda:
Balance on goods (lines 3 and 20) -36485
Balance on services (lines 4 and 21) 12329
Balance on goods and services (lines 2 and 19) -24156
Balance on income (lines 12 and 29) 35164
Unilateral current transfers, net (line 35) -16544
Balance on current account (lines 1, 18, and 35 or -5536
lines 74, 75, and 76)/13/
Source: U.S. Bureau of Economic Analysis
Monday, 27 February, 12
36. BOP: Capital & Financial Account
✤ Shows how a country’s assets and liabilities change over time
✤ Remember that the figures in the capital account represent changes
(increases or decreases) in assets & liabilities, not the absolute
amounts!
Monday, 27 February, 12
37. 2008
Capital account
Capital account transactions, net 953
Financial account
U.S.-owned assets abroad, excluding financial derivatives (increase/financial outflow (-)) -106
U.S. official reserve assets -4848
Gold/7/ 0
Special drawing rights -106
Reserve position in the International Monetary Fund -3473
Foreign currencies -1269
U.S. government assets, other than official reserve assets -529615
U.S. credits and other long-term assets -2202
Repayments on U.S. credits and other long-term assets/8/ 2354
U.S. foreign currency holdings and U.S. short-term assets -529766
U.S. private assets 534357
Direct investment -332012
Foreign securities 60761
U.S. claims on unaffiliated foreigners reported by U.S. nonbanking concerns 372229
U.S. claims reported by U.S. banks and securities brokers/14/ 433379
Foreign-owned assets in the United States, excluding financial derivatives (increase/financial inflow (+)) 534071
Foreign official assets in the United States 487021
U.S. government securities 543498
U.S. Treasury securities/9/ 477652
Other/10/ 65846
Other U.S. government liabilities/11/ 8626
U.S. liabilities reported by U.S. banks and securities brokers -153443
Other foreign official assets/12/ 88340
Other foreign assets in the United States 47050
Direct investment 319737
U.S. Treasury securities 196619
U.S. securities other than U.S. Treasury securities -126737
U.S. currency 29187
U.S. liabilities to unaffiliated foreigners reported by U.S. nonbanking concerns -45167
U.S. liabilities reported by U.S. banks and securities brokers/15/ -326589
Financial derivatives, net -28905
Statistical discrepancy (sum of above items with sign reversed) 200055
Monday, 27 February, 12
