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Chap037
- 1. International Trade Chapter 37 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
- 2. Chapter Objectives • Comparative advantage and the gains from trade • Exports and imports • Economic effects of tariffs and quotas • Arguments for protectionism 37-2
- 3. Some Key Facts • U.S. trade deficit in goods –$815 billion in 2007 • U.S. trade surplus in services –$107 billion in 2007 • Canada largest U.S. trade partner • Trade deficit with China –$257 billion in 2007 • Exports are 12% U.S. output • Dependence on oil 37-3
- 4. World Exports Germany United States China Japan France Netherlands United Kingdom Italy 0 2 4 6 8 10 12 9.20 8.59 8.02 5.38 4.06 3.83 3.71 3.40 Source: World Trade Organization Percentage Share of World Exports, Selected Nations, 2007 37-4
- 5. Economic Basis for Trade • Nations have different resource endowments • Labor-intensive goods • Land-intensive goods • Capital-intensive goods 37-5
- 6. Comparative Advantage • Assumptions –Two nations –Same size labor force –Constant costs in each country –Different costs across countries –U.S. absolute advantage in both • Opportunity cost ratio –Slope of the curve –Coffee sacrificed per ton of wheat 37-6
- 7. Coffee(Tons) 30 25 20 15 10 5 0 35 40 45 5 10 15 20 25 30 Wheat (Tons) Coffee(Tons) 30 25 20 15 10 5 0 35 40 45 5 10 15 20 Wheat (Tons) (a) United States (b) Brazil 12 18 8 4 A B Comparative Advantage 37-7
- 8. • Self-sufficiency output mix • Specialization and trade • Produce good with lowest domestic opportunity cost • Opportunity cost 1 ton wheat –1 pound of coffee in U.S. –2 pounds of coffee in Brazil Comparative Advantage 37-8
- 9. • Terms of trade –U.S. 1W = 1C –U.S. will sell 1W for more than 1C –Brazil 1W = 2C –Brazil will pay less than 2C for 1W –Settle between the two –Depends on supply/demand factors –Assume 1W = 1.5C Comparative Advantage 37-9
- 10. • Gains from trade –Trade possibilities line –Slope equals terms of trade –Improved options • Complete specialization • More of both goods • More efficient resource allocation Comparative Advantage 37-10
- 11. Economic Basis for Trade Coffee(Tons) 30 25 20 15 10 5 0 35 40 45 5 10 15 20 25 30 Wheat (Tons) Coffee(Tons) 30 25 20 15 10 5 0 35 40 45 5 10 15 20 Wheat (Tons) (a) United States (b) Brazil 12 18 8 4 A B A’ B’ C C’ W c w w’ Trading Possibilities Line Trading Possibilities Line 37-11
- 12. Comparative Advantage • Trade with increasing costs –Concave production curve –Resources not perfectly substitutable –Incomplete specialization • The case for free trade –Promote efficiency –Promote competition 37-12
- 13. Supply and Demand Analysis • World price • Domestic price with no trade • World price > domestic price –Export surplus –Export supply curve • World price < domestic price –Import shortage –Import supply curve 37-13
- 14. Price(PerPound;U.S.Dollars 1.50 1.25 1.00 .75 .50 0 50 75 100 125 150 Quantity of Aluminum (Millions of Pounds) 1.50 1.25 1.00 .75 .50 0 50 100 Quantity of Aluminum (Millions of Pounds) Price(PerPound;U.S.Dollars (a) U.S. Domestic Aluminum Market (b) U.S. Export Supply and Import Demand Dd Sd U.S. Export Supply U.S. Import Demand a b c x y Surplus = 50 Surplus = 100 Shortage = 50 Shortage = 100 Supply and Demand Analysis 37-14
- 15. Supply and Demand Analysis Price(PerPound;U.S.Dollars 1.50 1.25 1.00 .75 .50 0 50 75 100 125 150 Quantity of Aluminum (Millions of Pounds) 1.50 1.25 1.00 .75 .50 0 50 100 Quantity of Aluminum (Millions of Pounds) Price(PerPound;U.S.Dollars (a) Canada’s Domestic Aluminum Market (b) Canada’s Export Supply and Import Demand Dd Sd Canadian Export Supply Canadian Import Demand q r s t Surplus = 50 Surplus = 100 Shortage = 50 37-15
- 16. International Equilibrium 1.00 .75 .88 0 50 100 Quantity of Aluminum (Millions of Pounds) Price(PerPound;U.S.Dollars Import demand = Export supply Canadian Export Supply Canadian Import Demand e U.S. Export Supply U.S. Import Demand Equilibrium 37-16
- 17. Trade Barriers • Tariffs –Revenue tariff –Protective tariff • Import quota • Nontariff barrier (NTB) • Voluntary export restriction (VER) 37-17
- 18. Trade Barriers • Economic impact of tariffs • Direct effects –Decline in domestic consumption –Increase in domestic production –Decline in imports –Tariff revenue • Indirect effects 37-18
- 19. Trade Barriers Quantity Price 0 Dd Sd Pd q Sd + Q Pt Pw a b c d Economic Effects of a Tariff or Quota 37-19
- 20. The Case for Protection • Different arguments • Military self-sufficiency • Diversification for stability • Infant industry • Protection against dumping • Increased domestic employment • Cheap foreign labor 37-20
- 21. The WTO Protests • World Trade Organization has 151 member nations –Liberalize trade through negotiation • Protest groups –Labor unions, environmentalists, socialists, anarchists • Key issues for the protestors –Labor protection and environmental standards 37-21
- 22. Key Terms • labor-intensive goods • land-intensive goods • capital-intensive goods • opportunity-cost ratio • principle of comparative advantage • terms of trade • trading possibilities line • gains from trade • world price • domestic price • export supply curve • import demand curve • equilibrium world price • tariffs • revenue tariff • protective tariff • import quota • nontariff barrier (NTB) • voluntary export restriction (VER) • strategic trade policy • dumping • Smoot-Hawley Tariff Act • World Trade Organization (WTO) • Doha Round 37-22
- 23. Next Chapter Preview… Exchange Rates, the Balance of Payments, and Trade Deficits 37-23