International Trade PDF

6 International Trade McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.  Chapter Objectives Comparative advantage and the gains from trade Exports and imports Economic effects of tariffs and quotas Arguments for pro...

6 International Trade McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.  Chapter Objectives Comparative advantage and the gains from trade Exports and imports Economic effects of tariffs and quotas Arguments for protectionism 37-2  Some Key Trade Facts U.S. trade deficit in goods $517 billion in 2009 U.S. trade surplus in services $138 billion in 2009 Canada largest U.S. trade partner Trade deficit with China $220 billion in 2009 Exports are 13% U.S. output Dependence on oil LO1  Some Key Trade Facts Principal U.S. exports include: Chemicals Agricultural products Consumer durables Semiconductors Aircraft U.S. provides about 8.5% of world’s exports LO1  Some Key Trade Facts Principal U.S. imports include: Petroleum Automobiles Metals Household appliances Computers LO1  Some Key Trade Facts LO1  Some Key Trade Facts LO1  Economic Basis for Trade Nations have different resource endowments Labor-intensive goods Land-intensive goods Capital-intensive goods Efficient production may require different combination of resources Product differentiation LO2  Comparative Advantage Assumptions Two nations Same size labor force Constant costs in each country Different costs between countries U.S. absolute advantage in both Opportunity cost ratio Slope of the curve Vegetables sacrificed per ton of beef LO2  Comparative Advantage (a) United States 45 (b) Mexico 45 40 40 35 35 30 30 Vegetables (Tons) Vegetables (Tons) 25 25 20 20 15 15 12 10 A 10 5 5 4 Z 0 0 5 10 15 18 20 25 30 5 8 10 15 20 Beef (Tons) Beef (Tons) LO2  Comparative Advantage Self-sufficiency output mix Specialization and trade Produce the good with the lowest domestic opportunity cost Opportunity cost of 1 ton of beef: 1 pound of vegetables in U.S. 2 pounds of vegetables in Mexico LO2  Comparative Advantage LO2  Comparative Advantage Terms of trade U.S. 1V = 1B U.S. will sell 1B for more than 1V Mexico 2V = 1B Mexico will pay less than 2V for 1B Settle between the two Depends on supply/demand factors Assume 1B = 1.5V LO2  Comparative Advantage Gains from trade Trading possibilities line Slope equals terms of trade Improved options Complete specialization More of both goods More efficient resource allocation LO2  Gains from Trade 45 (a) United States 45 (b) Mexico V’ 40 40 35 35 Trading Possibilities Line 30 30 V Vegetables (Tons) Vegetables (Tons) Trading 25 25 Possibilities Line v 20 20 A’ 15 15 12 A 10 10 Z’ 5 5 4 Z B W b b’ 0 0 5 10 15 18 20 25 30 5 8 10 15 20 Beef (Tons) Beef (Tons) LO2  Comparative Advantage Trade with increasing costs Concave production curve Resources not perfectly substitutable Incomplete specialization Case for free trade Promote efficiency Promote competition LO2  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 demand curve LO3  Supply and Demand Analysis (a) U.S. Domestic (b) U.S. Export Supply Aluminum Market and Import Demand Surplus = 100 Sd Price (Per Pound; U.S. Dollars Price (Per Pound; U.S. Dollars 1.50 1.50 c Surplus = 50 U.S. 1.25 1.25 Export b Supply 1.00 1.00 a U.S. Import.75.75 Demand x Shortage = 50.50.50 Dd y Shortage = 100 0 0 50 75 100 125 150 50 100 Quantity of Aluminum Quantity of Aluminum (Millions of Pounds) (Millions of Pounds) LO3  Supply and Demand Analysis (a) Canada’s Domestic (b) Canada’s Export Supply Aluminum Market and Import Demand Price (Per Pound; U.S. Dollars Price (Per Pound; U.S. Dollars 1.50 1.50 Surplus = 100 Sd 1.25 1.25 s Surplus = 50 1.00 1.00 Canadian r Export Supply.75.75 q Canadian Import.50.50 Demand Shortage = 50 t Dd 0 0 50 75 100 125 150 50 100 Quantity of Aluminum Quantity of Aluminum (Millions of Pounds) (Millions of Pounds) LO3  International Equilibrium Import demand = Export supply Price (Per Pound; U.S. Dollars U.S. Export Supply Canadian Export Supply 1.00 e.88 Equilibrium.75 U.S. Import Demand Canadian Import Demand 0 50 100 Quantity of Aluminum (Millions of Pounds) LO3  Trade Barriers and Export Subsidies Tariffs Revenue tariff Protective tariff Import quota Nontariff barrier (NTB) Voluntary export restriction (VER) Export subsidy LO4  Economic Impact of Tariffs Direct effects Decline in consumption Increase in domestic production Decline in imports Tariff revenue Indirect effects LO4  Economic Impact of Quotas Decline in consumption Increase in domestic production Decline in imports Quotas do not provide for any government revenue but instead transfer it to foreign producers LO4  Economic Effects of Tariff/Quota Sd Sd + Q Price Pd Pt Pw Dd 0 a b q c d Quantity LO4  The Case for Protection Military self-sufficiency Diversification for stability Infant industry Protection against dumping Increased domestic employment Cheap foreign labor LO5  Multilateral Trade Agreements General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) European Union (EU) North American Free Trade Agreement (NAFTA) LO5  GATT Three principles: Equal, nondiscriminatory trade between member nations Reduction in tariffs Elimination of import quotas LO5  WTO Established by Uruguay Round of GATT 153 member nations in 2010 Oversees trade agreements and rules on disputes Critics argue that it may allow nations to circumvent environmental and worker-protection laws LO5  European Union Initiated in 1958 as Common Market Abolished tariffs and import quotas between member nations Established common tariff with nations outside the EU Created Euro Zone with one currency LO5  NAFTA Agreement between U.S., Canada, and Mexico Established a free trade zone between the countries Trade has increased in all countries Enhanced standard of living LO5