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37 - 1Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
INTERNATIONALTRADE
37C H A P T E R
37 - 2Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Exports Have Doubled asa Percent of GDP since 1975
$435 Billion Trade Deficit in 2002 ($369 Billion in 2000)
Export Goods & Services 11% of American GDP
KEY FACTS ON TRADE
37 - 3Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
United States
GermanyJapan
FranceUnited
KingdomChina
CanadaItaly
0 2 4 6 8 10 12
GLOBAL PERSPECTIVEShares of World Exports, Selected Nations, 2001
Source: World Trade Organization
37 - 4Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
ECOMOMIC BASIS FOR TRADEDistribution of Economic
ResourcesDifferent Technologies and/or
ResourcesGoods are Differentiated as to
Quality and other Nonprice Attributes
Labor-Intensive GoodsLand-Intensive GoodsCapital-Intensive Goods
37 - 5Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
COMPARATIVE ADVANTAGETwo Isolated NationsConstant Costs
Straight Line PPF’sDifferent Costs
Different Technology and Resources in Each Nation
Cost RatioSelf-Sufficiency Output MixTrading According to Comparative Advantage
Graphically...
37 - 6Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
PRODUCTION POSSIBILITIES
A
B
Co
ffee
(to
ns)
Co
ffee
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
Wheat (tons) Wheat (tons)
Curve For Each CountryUnited States Brazil
37 - 7Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Total output will be greatest wheneach good is produced by the nationthat has the lowest domesticopportunity cost for that good.
U.S has comparative advantage in wheat.
Brazil has comparative advantage in coffee.
Principle of Comparative Advantage
PRODUCTION POSSIBILITIES
37 - 8Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Terms of Trade
Gains From TradeImproved OptionsAdded Output
Principle of Comparative Advantage
PRODUCTION POSSIBILITIES
Trading Possibilities Line
Graphically…
37 - 9Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TRADING POSSIBILITIES LINES
Co
ffee
(to
ns)
Co
ffee
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
A
B
Tradingpossibilities line
Tradingpossibilities line
Wheat (tons) Wheat (tons)
The Gains from TradeUnited States Brazil
37 - 10Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TRADING POSSIBILITIES LINES
Co
ffee
(to
ns)
Co
ffee
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
A
B
Tradingpossibilities line
Tradingpossibilities line
A’
B’
Wheat (tons) Wheat (tons)
The Gains from TradeUnited States Brazil
37 - 11Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TRADING POSSIBILITIES LINES
Co
ffee
(to
ns)
Co
ffee
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
A
B
Tradingpossibilities line
Tradingpossibilities line
A’
B’
Wheat (tons) Wheat (tons)
The Gains from TradeUnited States Brazil
The Case ForFree Trade
37 - 12Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
SUPPLY AND DEMANDIN THE UNITED STATES
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
Dd
Sd
If the world priceexceeds the U.S.
price by 25 cents...
$1.50
1.25
1.00
.75
.50
.25Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150Quantity of Aluminum
10050P
rice
(p
er p
ou
nd
; U
.S. d
olla
rs)
$1.50
1.25
1.00
.75
.50
.25
Quantity of Aluminum
37 - 13Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
EXPORTS = 50
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
$1.50
1.25
1.00
.75
.50
.25
If the world pricegoes further up...
Sd
Quantity of Aluminum Quantity of Aluminum
SUPPLY AND DEMANDIN THE UNITED STATES
37 - 14Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
EXPORTS = 50
EXPORTS = 100
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
SURPLUS = 100 $1.50
1.25
1.00
.75
.50
.25
If world pricesfall below $1.00...
Sd
U.S.exportsupply
Quantity of Aluminum Quantity of Aluminum
SUPPLY AND DEMANDIN THE UNITED STATES
37 - 15Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
SHORTAGE = 50
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
SURPLUS = 100 $1.50
1.25
1.00
.75
.50
.25
Sd
EXPORTS = 50
EXPORTS = 100
IMPORTS = 50
U.S.exportsupply
Quantity of Aluminum Quantity of Aluminum
SUPPLY AND DEMANDIN THE UNITED STATES
37 - 16Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
SHORTAGE = 50
SHORTAGE = 100
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
SURPLUS = 100
U.S.exportsupply
EXPORTS = 50
EXPORTS = 100
IMPORTS = 50
IMPORTS = 100
U.S.import
demand
$1.50
1.25
1.00
.75
.50
.25
Sd
Quantity of Aluminum Quantity of Aluminum
SUPPLY AND DEMANDIN THE UNITED STATES
37 - 17Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Canada’s DomesticAluminum Market
Canada’s Export SupplyAnd Import Demand
DdSHORTAGE = 50
$1.50
1.25
1.00
.75
.50
.25
10050
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 100
Canadianexportsupply
Canadianimport
demand
$1.50
1.25
1.00
.75
.50
.25
Sd
SURPLUS = 50
Quantity of Aluminum Quantity of Aluminum
SUPPLY AND DEMANDIN THE CANADA
37 - 18Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
EQUILIBRIUM WORLD PRICE ANDQUANTITY OF EXPORTS & IMPORTS
Pri
ce (
per
po
un
d;
U.S
. d
oll
ars)
U.S. exportsupply
U.S. importdemand
Quantity of Aluminum
Canadianexportsupply
Canadian importdemand
10050
$1.50
1.25
1.00
.75
.50
.25
25
.88 Equilibrium
37 - 19Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TRADE BARRIERSTariffsRevenue TariffProtective TariffImport QuotaNontariff Barrier (NTB)Voluntary Export
Restriction (VER)Mercantilism
37 - 20Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
ECONOMIC IMPACT OF TARIFFS
Direct Effects:• Decline in Consumption• Increased Domestic
Production• Decline in Imports• Tariff Revenue
Indirect Effect
37 - 21Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
ECONOMIC IMPACT OF TARIFFS
Economic Impact of
Quotas
Net Costs of Tariffs and
Quotas
Impact On Income
Distribution
37 - 22Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
THE CASE FOR PROTECTIONMilitary Self-SufficiencyIncrease Domestic Employment
•Job Creation From Imports•Fallacy of Composition•Possibility of Retaliation
•Smoot-Hawley Act of 1930•Long-run feedbacks
Diversification-For-StabilityInfant-Industry ArgumentStrategic Trade PolicyProtection-Against-DumpingCheap Foreign Labor
37 - 23Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
World Trade Organization (WTO)•Reductions in Tariffs Worldwide
•New Rules to Promote Trade in Services
•Reduction in Agricultural Subsidies
•Intellectual Property Protections
•Phasing Out Textile Quotas and Tariffs
THE WORLD TRADE ORGANIZATION
export supply curveimport demand curveequilibrium world pricetariffsrevenue tariffprotective tariffimport quotanontariff barrier (NTB)voluntary export restriction
(VER)strategic trade policydumpingWorld Trade Organization
(WTO)
labor-intensive goodsland-intensive goodscapital-intensive goodscost ratioprinciple of comparative advantageterms of tradetrading possibilities linegains from tradeworld pricedomestic price
ENDBACKCopyright McGraw-Hill/Irwin, 2005
37 - 25Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price and Quantity of Exports and Imports
Trade Barriers
Economic Impact of Tariffs
The Case for Protection
The World Trade Organization
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
EXCHANGE RATES,THE BALANCE OF PAYMENTS,AND TRADE DEFICITS
Chapter 38
Coming soon...
