International Trade - Download as PowerPoint by 9ox54VU

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									Objectives

After studying this chapter, you will able to


 Describe the trends and patterns in international trade


 Explain comparative advantage and the economic
  implications of free trade


 Explain why international trade restrictions reduce the
  volume of imports and exports, and reduce our
  consumption possibilities
Patterns and Trends in International
Trade
Trade in Goods


Manufactured goods represent 55 percent of U.S. imports
and 68 percent of exports.


Raw materials and semi-manufactured materials represent
14 percent of U.S. exports and 15 percent of imports.


The largest export item from the United States is capital
goods and the largest import item is automobiles.
Patterns and Trends in International
Trade

Trade in Services
 International trade in services such as travel,
 transportation, and insurance is large and growing.
Geographical Patterns of International Trade
Trading relation US-Canada is the largest in the world
(446 billion dollars per year, and growing)
Mexico is the second largest trading partner of the US
(Mexico US trade = 266 billion per year, and growing)
Patterns and Trends in U.S. international
trade

Trends in the Volume of Trade
 In 1960, the United States exported 3.5 percent of its total
 output and imported 4 percent of the total amount that
 Americans spent on goods and services.
In 2005, the United States exported 10 percent of its total
output and imported 16 percent of the total amount that
Americans spent on goods and services.
International trade is expanding rapidly (each year there
are new record numbers for exports and imports)
Patterns and Trends in International
Trade

Net Exports
 The value of exports minus imports is called net exports.


During the third quarter of 2006, imports exceeded exports
in the United States, so net exports were negative $810
billion (trade balance)
Some people do not like free trade agreements
What can you say about the
economic impact of trade?

The benefits of trade


The costs of trade


The economic impact of trade restrictions
What drives countries to trade?

Comparative advantage is the fundamental force that
generates trade between nations.


The basis for comparative trade is divergent opportunity
costs between countries.


Nations can increase their consumption of goods and
services when they allocate resources to the production of
those goods and services for which they have a
comparative advantage.
   Production and Consumption
Possibilities and the Benefits of Trade

A country’s PPC (Production Possibilities
Curve) shows the quantities of different
goods that its economy can produce.

Consumption Possibilities: combinations of
goods and services that a country’s
citizens might feasibly consume.
Production and Consumption Possibilities

 Two good economy -- computers and coffee

 Two workers who work 50 weeks/year
  – Carlos
      Can produce 100 pounds or 1 computer per week
  – Maria
      Can produce 100 pounds or 2 computers per week
        How to construct the PPC?

1.   Find the extremes (maximum feasible production for
     each type of good).

2.   Start at one of the extremes (assume all productive
     resources are devoted to producing one type of
     good – say is the y-axis good)

3.   What is the best way of producing some units of the
     x-axis good?
   How to construct PPC (2)
The agent with the comparative advantage
(lowest cost) should produce the x-axis
good.

Once you exhaust the time available to
this individual, find the agent with the
second lowest cost.

And so on…
     Production Possibilities
Curve for a Two-Worker Economy
                                A
                       10,000

                                                      SlopeAC = Maria’s OCcomputers =
Coffee (pounds/year)




                                                      - 50 pounds coffee/computer



                        5,000                         C
                                                          SlopeCB = Carlos’ OCcomputers =
                                                          - 100 pounds coffee/computer




                                                                  B
                                                100            150
                                    Computers (number/year)
     Production Possibilities
Curve for a Three-Worker Economy
                                      Maria produces computers
                       A
                                    C
Coffee (pounds/year)




                                                     Maria and Pedro
                                                     produce computers
                                                D


                                                           All three workers
                                                           produce computers



                                                     B
                           Computers (number/year)
   Production and Consumption
Possibilities and the Benefits of Trade

  In a closed economy:

   – Society’s production possibilities =
     consumption possibilities.
Closed economy: consumption
   possibilities = production
         possibilities               Without Trade
                                     •Brazil’s consumption possibilities = ACB
                                     •Assume production is at C
                                     •The OC of 50 lbs coffee = 1 computer
                                     •The OC of 1 computer = 100 lbs coffee
                                 A
 Coffee (pounds/year)




                        10,000
                                                       Production possibilities
                                                       Slope = -50 pounds coffee/computer


                                                            Production possibilities
                         5,000
                                                  C         Slope = -100 pounds coffee/computer




                                                        B
                                                100         150
                                      Computers (number/year)
                                         Computers (number/year)
                       Open economy consumption possibilities

                                F          Consumption possibilities with trade
                       13,000              Slope = -80 pounds coffee/computer

                                                   With Trade
Coffee (pounds/year)




                                                   • World market: 80 lbs coffee for 1 computer
                                                   • Trade 100 computers for 8,000 lbs coffee +
                                                     5,000 lbs from Carlos = 13,000 lbs
                                                   • Trade 80 lbs coffee for 1 computer or 5,000
                                                     lbs of coffee for 62.5 computers + 100
                                                     computers from Maria = 162.5 computers
                                                   • Consumption Possibilities = FCG
                                               C
                        5,000




                                                                 G
                                            100              162.5
                                         Computers (number/year)
                                    Computers (number/year)
                       Implications of opening to trade

                                F          Consumption possibilities with trade
                       13,000              Slope = -80 pounds coffee/computer


                                A                   Production possibilities
Coffee (pounds/year)




                       10,000
                                                    Slope = -50 pounds coffee/computer




                                               C
                        5,000




                                                     B         G
                                             100         150 162.5
                                    Computers (number/year)
Are the gains of one country
   the losses of another?
The consumers of the two countries win as a
result of free trade!
International Trade Restrictions

Governments restrict international trade to protect
domestic producers from competition by using two main
tools
 Tariffs
 Nontariff barriers
A tariff is a tax that is imposed by the importing country
when an imported good crosses its international boundary.
A nontariff barrier is any action other than a tariff that
restricts international trade.
International Trade Restrictions

The History of
Tariffs
 This figure shows
 the average tariff
 rate over the last
 70 years.
Average tariffs
reached their peak
of 20 percent in
1933.
The Case Against Protection

Despite the fact that free trade promotes prosperity, trade is
restricted.
It is often argued that international trade should be
restricted to
Protect infant industries
 Punish dumping
 Save jobs
 Allow us to compete with cheap foreign labor
 Prevent rich nations from exploiting poor ones
The Case Against Protection

The Infant Industry Argument
The infant-industry argument is that it is necessary to
protect a new industry from import competition to enable it
to grow into a mature industry that can compete in world
markets.
The Case Against Protection

The Dumping Argument
Dumping occurs when foreign a firm sells its exports at a
lower price than its cost of production.
Dumping is seen as a justification for a tariff to prevent a
foreign firm driving domestic firms out of business and
then raising its price.
Problem:
It is virtually impossible to determine a firm’s costs;
The Case Against Protection

Saves Jobs
The idea that buying foreign goods costs domestic jobs is
wrong.
It destroys some jobs and creates other better jobs.
It also increases foreign incomes and enables foreigners
to buy more domestic production.
Protection to save particular jobs is very costly.
The Case Against Protection

Allows us to Compete with Cheap Foreign Labor
The idea that a high-wage country cannot compete with a
low-wage country is wrong.


Low-wage labor is less productive than high-wage labor.
The Case Against Protection

Prevents Rich Countries from Exploiting Poorer
Countries
 The idea that trade restrictions prevent rich countries from
 exploiting poorer countries is wrong.


Free trade is the best way of raising wages and improving
working conditions in poor countries.
The Case Against Protection

The most compelling argument against protection is that it
invites retaliation.


We have seen it today as the world reacts to high U.S.
tariffs on steel and agriculture.
Why Is International Trade Restricted?

The two key reasons why international trade is restricted
are
 Tariff revenue
 Rent seeking
Why Is International Trade Restricted?

Tariff Revenue
 It is costly for governments to collect taxes on income and
 domestic sales.


It is cheaper for governments to collect taxes on
international transactions because international trade is
carefully monitored.


This source of revenue is especially attractive to
governments in developing nations.
Why Is International Trade Restricted?

Rent Seeking
Rent seeking is lobbying and other political activities that
seek to capture the gains from trade.


Despite the fact that protection is inefficient, governments
respond to the demands of those who gain from protection
and ignore the demands of those who gain from free trade
because protection brings concentrated gains and diffused
losses.
Why Is International Trade Restricted?

Compensating Losers
The gains from free trade exceed the losses, and
sometimes free trade agreements address the issue of the
distribution of gains from trade by compensating those
who lose from free trade.
For example, under NAFTA, a $56 million fund was
created to support and retrain workers who lot their jobs
from foreign competition resulting from the agreement.

								
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