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Chapter 33International trade

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008

PowerPoint presentation by Alex Tackie and Damian Ward

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Import and Export /GDP in Turkey (%)

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The Exports and Imports in the World.

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The components of the World’s exports (2000-

2010)

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World Exports by Commodity Groups, 2010

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Exports and Imports in Turkey (2000-2011)

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Turkey’s Exports by Region

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The Turkey’s Exports and Imports by Country in 2010 (Percentage of Total Trade)

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Exports to the GDP (%)

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Some important issues• Raw materials prices

– Less-developed countries (LDCs) have claimed exploitation by industrial countries

• e.g. by buying raw materials cheaply & selling manufactures dear

• Manufactured exports from LDCs

– some LDCs have had success in exporting manufactures

– leading to complaints that jobs are under threat in the industrial countries

• Trade disputes between industrial countries

– In some countries, established producers of certain goods are being undercut by efficient modern producers

– especially from Japan & East Asia

– should such exports be restricted?

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Comparative advantage

• Trade offers benefits when there are international differences in the opportunity cost of goods.

• Opportunity cost of a good– the quantity of other goods sacrificed to make

one more unit of that good

• The law of comparative advantage– states that countries should specialise in

producing and exporting the goods that they produce at a lower relative cost than other countries.

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The source of comparative advantage

• An important difference between countries is in factor endowments

• which will be reflected in different relative factor prices– e.g. if the UK has relatively abundant capital but relatively

scarce labour as compared with India,

– then the UK would tend to specialise in capital-intensive goods,

– and India would tend to specialise in labour-intensive products

• Comparative advantage may also reflect a relative advantage in technology

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Gainers and losers

• Countries may gain from specialisation and trade – but not all countries may gain equally

• Commercial policy– is government policy that influences

international trade through taxes or subsidies• e.g. tariffs

– or through direct restrictions on imports and exports.

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The economic effects of a tariff

DD and SS show the domestic demand and supply for a good.

If the world price is Pw,and there is free trade,

domestic firms supply Qs

domestic demand is Qd

A tariff can stimulate domesticsupply and restrict imports.

At a domestic price Pw + T,

where T is the size of the tariff.Domestic demand falls to Qd', domestic supply rises to Qs'

and the difference is imported.

and imports fall.

DD

SS

Quantity

Price

Pw

Qs Qd

Pw+ T

Qs' Qd'

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The government raisesrevenue – i.e. there is atransfer to the government

There is a social cost from production inefficiency, given that thegood could be imported at Pw, and a loss of consumer surplus.

and there is a transfer in the form of extra profits to producers.

The welfare costs of a tariff

DD

SS

Quantity

Price

Qs Qd

Pw+ T

Qs' Qd'

The tariff leads both to transfers and net sociallosses.

Pw

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Tariffs

• The deadweight burden of a tariff suggests that society suffers from this method of restricting trade.

• This is the case for free trade.

• Tariffs have fallen substantially under the GATT– General Agreement on Tariffs and Trade

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The case for tariffs – good arguments

• Optimal tariff– a first-best argument– only valid where the importing country is large

enough to affect the world price.

• This policy fulfils the principle of targeting– which says that the most efficient way to attain a

given objective is to use a policy that influences that activity directly.

– Policies that attain the objective, but also influence other activities are second-best, because they distort those other activities.

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The case for tariffs – second-best arguments

• Way of life– an attempt to preserve ‘traditional’ ways– a production subsidy would be better

• Suppressing luxuries– an attempt to curb consumption patterns of the rich in a poor

society– better achieved by a consumption tax

• Infant industries– an attempt to nurture new activities via learning by doing– a temporary production subsidy probably better

• Revenue– tariffs raise government revenue– but there are better ways

• Cheap foreign labour– a non-argument – denies benefits of comparative advantage

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Other commercial policies

• Although tariff rates have fallen under GATT, there has been a proliferation of other trade restrictions– quotas– non-tariff barriers

• administrative regulations that discriminate against foreign goods

– export subsidies