Principles of Macroeconomics - Chapter 10: International Trade

Principles of Macroeconomics SAYRE // MORRIS // GHAYAD Eleventh Edition CHAPTER 10 International Trade Prepared by Ifeanyi Uzoka, Sheridan College  CHAPTER 10...

Principles of Macroeconomics SAYRE // MORRIS // GHAYAD Eleventh Edition CHAPTER 10 International Trade Prepared by Ifeanyi Uzoka, Sheridan College  CHAPTER 10 International Trade Learning Objectives: 1. Explain the importance of international trade and why nations trade with each other 2. Explain why nations import certain goods, even though they can be made more cheaply at home 3. Explain how the gains from trade are divided between trading © 2024 McGraw Hill partners 10-2  CHAPTER 13 International Trade 4. Describe why some groups win and others lose as a result of freer trade 5. Identify various restrictions to, and some arguments against, free trade © 2024 McGraw Hill 10-3  LO1: Specialization and Trade © 2024 McGraw Hill 10-4 Trends in World Trade and GDP 1971-2021 © 2024 McGraw Hill 10-5 Trends in International Trade by Major Areas, 2001–2021 © 2024 McGraw Hill 10-6 Merchandise Trade Between the Three Continents, 2017 © 2024 McGraw Hill 10-7  The World’s Leading Trading Nations in 2021 © 2024 McGraw Hill 10-8  Specialization Factor endowment – An advantage in production comes from better skills, equipment, or other resources. © 2024 McGraw Hill 10-9  Factor endowment Differences in trade patterns are the result of −differences in climate −differences in natural resources −differences in human capital −government policies © 2024 McGraw Hill 10-10  Theory of Absolute Advantage Theory of absolute advantage – Nations, like firms and individuals, should specialize in producing goods and services for which they have an advantage – They should trade for goods and © 2024 McGraw Hill 10-11 services for which they do not enjoy an  Absolute Advantage The table shows the productivity per worker of producing wheat and beans inTable Canada and 10.1 Output Mexico. per Worker by Country and Industry NUMBER OF BUSHELS PER DAY Wheat Beans Canada 3 Or 2 Mexico 1 Or 4 Canada is more productive at producing wheat than is Mexico, whereas Mexico is more productive at producing beans than is Canada © 2024 McGraw Hill 10-12  No Specialization, No Trade Example Continued: No trade, each country has 16 million population (8 million in each industry) Table 10.2 Total Outputs Before Trade TOTAL NUMBER OF BUSHELS PER DAY (in millions) Wheat Beans Canada 24 16 Mexico 8 32 Total 32 48 © 2024 McGraw Hill 10-13  With Specialization and Trade Example Continued: With trade, each country has 16 million population (8 million in each industry) Table 10.3 Total Outputs After Trade TOTAL NUMBER OF BUSHELS PER DAY (in millions) Wheat Beans Canada 48 0 Mexico 0 64 Total 48 64 With specialization, the two countries combined could produce an additional 16 million bushels of wheat (48 minus the previous 32) and an additional16 million bushels ofHillbeans (64 minus the © 2024 McGraw 10-14 previous 48). These are referred to as the gains Specialization and Trade Specialization and trade go hand in hand: – Specialization leads to increased total production – But if a country is going to specialize, it will need to trade in order to obtain those products it is not producing. – Specialization, then, implies trade, and it would be impossible © 2024 McGrawto Hill have one 10-15 Test Your Understanding The table below shows the productivity per worker in the beer and wine industries of Freedonia and Libraland: Beer Wine Freedonia 4 1 Libraland 3 4 – Which country should specialize in which product? © 2024 McGraw Hill 10-16 Test Your Understanding The table shows the productivity per worker in the beer and wine industries Beer Wine of Freedonia and Libraland: Freedonia 4 1 Libraland 3 4 – Which country should specialize in which product? Freedonia should© 2024 specialize McGraw Hill in beer and 10-17 Test Your Understanding Beer Wine Freedonia 4 1 Libraland 3 4 – Suppose that initially the working population of each country is 20 million, with 10 million working in each industry. – What is the total output of the two countries? © 2024 McGraw Hill 10-18 Test Your Understanding Beer Wine Freedonia 4 1 Libraland 3 4 – With a working population of each country is 20 million, with 10 million working in each industry. What is the total output of the two countries? Beer Wine Freedoni 40 million 10 million a Libralan 30 million 40 million d Totals 70© million 2024 McGraw Hill 50 million 10-19 Test Your Understanding Beer Wine Freedonia 4 1 Libraland 3 4 − Suppose that each country decides to specialize in the product in which it has an advantage. − What will be the total output of each product, and ©what are 2024 McGraw Hill the gains from 10-20  Test Your Understanding Beer Wine Freedonia 4 1 Libraland 3 4 Suppose that each country decides to specialize in the product in which it has an advantage. What will be the total output of each product, and what are the gains from trade? Beer Wine Freedoni 80 million 0 a Libralan 0 80 million d Totals Gains 80are million10 beer, 8030million wine © 2024 McGraw Hill 10-21  LO2: Theory of Comparative Advantage © 2024 McGraw Hill 10-22 Specialization and Trade Theory of Comparative Advantage – The advantage that comes from producing something at a lower opportunity cost than others are able to do © 2024 McGraw Hill 10-23  Comparative Advantage Table 10.4 Output per Worker by Country and Industry NUMBER OF BUSHELS PER DAY Wheat Beans United 4 or 4 States Philippines 1 or 3 Each country has a trade-off (opportunity cost) for each item it produces Table 10.5 Opportunity Costs of Production COST OF PRODUCING ONE UNIT Wheat Beans United 1 beans 1 wheat States Philippines 3 beans 1/3 wheat © 2024 McGraw Hill 10-24  Comparative Advantage The U.S. is comparatively better at making wheat – It gives up 1 beans, while Philippines gives up Table 10.4 Output per Worker by Country and Industry 3 NUMBER OF BUSHELS PER DAY Wheat Beans United 4 or 4 States Philippines 1 or 3 The Philippines is comparatively better at beans – It gives up 1/3 of© wheat, 2024 McGraw Hill while the U.S. gives 10-25 up  Production Without Trade Suppose the United States produces at C, while the Philippines produces at B (no trade) Table 10.6 Production Possibilities United States: Output (millions of bushels per day) A B C D E F Wheat 400 320 240 160 80 0 Beans 0 80 160 240 320 400 Philippines: Output (millions of bushels per day) A B C D E F Wheat 100 80 60 40 20 0 Beans 0 60 120 180 240 300 © 2024 McGraw Hill 10-26  Production Without Trade Suppose the United States produces at C, while the Philippines produces at B (no trade) Table 10.6 Production Possibilities United States: Output (millions of bushels per day) 240 A + 80B C D E F Wheat = 320 320 400 240 160 80 0 Beans Wheat 0 80 160 240 320 400 Philippines: Output (millions of bushels per day) A B C D 160 +E F Wheat 100 80 60 40 20 0 Beans 0 60 120 18060 =240 300 © 2024 McGraw Hill 220 10-27  Production Without Trade Suppose the United States specializes at A, while the Philippines specializes at F, and they Table 10.6 trade Production Possibilities United States: Output (millions of bushels per day) A B C D E F Wheat 400 320 240 160 80 0 Beans 0 80 160 240 320 400 Philippines: Output (millions of bushels per day) A B C D E F Wheat 100 80 60 40 20 0 Beans 0 60 120 180 240 300 © 2024 McGraw Hill 10-28  Production Without Trade Suppose the United States specializes at A, while the Philippines specializes at F, and they Table 10.6 trade Production Possibilities 400Output (millions of bushels per day) United States: A B C D E F Wheat Wheat 400 320 240 160 80 0 Beans 0 80 160 240 320 400 Philippines: Output (millions of bushels per day) A B C D E F Wheat 80 more100 Wheat 80 60 300 40 20 0 Beansand 0 60 120 Beans 180 240 300 80 more Beans, © 2024 McGraw Hill 10-29  LO3: Terms of Trade © 2024 McGraw Hill 10-30  Terms of Trade The average price of a country’s exports compared with the price of its imports Terms of trade = Average price of exports × 100 Average price of imports © 2024 McGraw Hill 10-31 Terms of Trade © 2024 McGraw Hill 10-32  No Trade Scenario 5 Table 10.10 Philippines Before Trade After Trade Beans produced 60 Beans exported 0 Beans consumed 60 Wheat produced 80 Wheat imported 0 Wheat consumed 80 United States Before Trade After Trade Beans produced 160 Beans exported 0 Beans consumed 160 Wheat produced 240 Wheat imported 0 Wheat consumed © 2024 McGraw Hill 240 10-33  No Trade Scenario 5 Table 10.10 Philippines Before Trade After Trade Beans produced 60 300 Beans exported 0 -240 Beans consumed 60 60 Wheat produced 80 0 Wheat imported 0 120 Wheat consumed 80 120 Gain = 40 Wheat United States Before Trade After Trade Beans produced 160 0 Beans exported 0 240 Beans consumed 160 240 Wheat produced 240 400 Wheat imported 0 -120 Wheat consumed © 2024 McGraw Hill 240 280 10-34 Gain = 80 Beans and 40  U.S. Production and Trading Possibilities Curves The slope before trade is 1 (1 wheat for 1 beans) If the terms of trade are 2 beans for 1 wheat, the maximum quantity of beans available to the U.S. increases © 2024 McGraw Hill 10-35 Philippines Production and Trading Possibilities Curves The slope before trade is 1/3 (1 wheat for 3 beans) If the terms of trade are 2 beans for 1 wheat, the maximum quantity of wheat available to the Philippines increases © 2024 McGraw Hill 10-36 Test Your Understanding Output/worker Apples Pears Freedonia 6 3 Libraland 3 2 – Assuming the two countries above wish to trade, would terms of trade of 1 bushel of pears = 2.5 bushels of apples be feasible? – What about 1 bushel of pears = 1 bushel of apples? – 1 bushel of pears = 1.75 bushels of apples? © 2024 McGraw Hill 10-37 Test Your Understanding Output/worker Apples Pears Freedonia 6 3 Libraland 3 2 – Assuming the two countries above wish to trade, would terms of trade of 1 bushel of pears = 2.5 bushels of apples be feasible? – What about 1 bushel of pears = 1 bushel of apples? – 1 bushel of pears = 1.75 bushels of apples? Only the last one is feasible. In Freedonia, 1 pear costs 2 apples. In Libraland 1 pear costs 1.5 apples. Therefore, the terms of trade must be between 1 pear = 1.5 to 2 apples. © 2024 McGraw Hill 10-38  Advantages of Free Trade Lower prices as the result of lower costs of production Higher incomes A greater variety and quality of products Increased competition © 2024 McGraw Hill 10-39  LO4: The Effect of Free Trade © 2024 McGraw Hill 10-40  Demand, Supply and Free Trade Table 10.12 The Market for Wine in France and Germany (millions of litres per month) FRANCE GERMANY TOTAL MARKET Price Demand Supply Demand Supply Demand Supply ($/L) 3 19 7 17 2 36 9 4 17 11 15 3 32 14 5 15 15 13 4 28 19 6 13 19 11 5 24 24 7 11 23 9 6 20 29 8 9 27 7 7 16 34 © 2024 McGraw Hill 10-41  Demand and Supply Without Free Trade Market for Wine: Demand and supply are higher in France In France the quantity is Higher, and the price is Lower. © 2024 McGraw Hill 10-42  Demand and Supply With Free Trade Market for Wine: The world price ($6) lies between the prices in France and Germany France’s surplus (exports) = Germany’s shortage (imports) © 2024 McGraw Hill 10-43  Winners and Losers from Free Trade Table 10.13 Winners Losers Domestic (German) Consumers Foreign (French) Consumers More product choices Pay higher prices Pay lower prices Foreign (French) Producers Domestic (German) Producers Bigger market Get lower prices Get higher prices More competition © 2024 McGraw Hill 10-44  LO5: Trade Restrictions and Protectionism © 2024 McGraw Hill 10-45  Trade Protection Types: – Import quotas – Tariffs – Currency-exchange controls – Bureaucratic regulations – Voluntary export restrictions © 2024 McGraw Hill 10-46  Trade Restrictions Quota – A limit imposed on the production or sale of a product Protectionism – The economic policy of protecting domestic producers by restricting the importation of foreign products © 2024 McGraw Hill 10-47  Import Quotas Import quotas raise the price, lower imports, and increase domestic production © 2024 McGraw Hill 10-48  Trade Restrictions Tariff – A tax (or duty) levied on imports Currency exchange controls – Government restrictions limiting the amount of foreign currencies that can be obtained © 2024 McGraw Hill 10-49  Effects of a Tariff Tariffs raise the price, lower imports, increase domestic production, and raise tax revenue © 2024 McGraw Hill 10-50  Trade Restrictions Bureaucratic regulations – Rules that make it hard for foreign products to enter the country, or require them to be modified before entering Voluntary export restriction (VER) – An agreement by an exporting country to restrict the amount of its © 2024 McGraw Hill 10-51 Arguments Against Free Trade 1. Strategic industry argument – A country’s strategic industries may be offered protection so the country does not become dependent on foreign manufacturers 2. Infant industry argument – Certain “infant” industries may be protected until they are sufficiently mature to take on foreign competition © 2024 McGraw Hill 10-52 Arguments Against Free Trade 3. Cultural identity argument – Free trade brings mass production and standardization, which may harm the importing country’s sense of identity 4. Environmental and labour standards – May be eroded to compete with countries whose standards are lower and have a cost advantage as a result © 2024 McGraw Hill 10-53  Arguments Against Free Trade 5. Argument citing the multiplier effect from domestic production 6. Uncontrolled movement of capital and labour argument © 2024 McGraw Hill 10-54  CHAPTER 10 Key Concepts to Remember: 1. Importance of international trade 2. Theories of absolute and comparative advantage 3. Gains from trade stem from differences in the opportunity costs of production 4. How the gains from trade are divided between trading partners 5. Why some groups win and others loose as a result of free trade 6. Trade restrictions and the arguments against free trade © 2024 McGraw Hill 10-55