Chapter 15International Trade:Does It Jeopardize

American Jobs?

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Chapter Outline

•WHAT WE TRADE AND WITH WHOM

•THE BENEFITS FROM TRADE

•BARRIERS TO TRADE•TRADE AS A DIPLOMATIC

WEAPON

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You Are Here

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Exports and ImportsAs a percentage of GDP

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What We Trade: Exports (2007)

Good Billions of Dollars of Exports

Industrial Eq 198.5

Elec. Mach. Aud & Video

148.4

Motor Vehicles 107.0

Aerospace 76.0

Optics 66.3

Services 497.2

1,645.7

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What We Trade: Imports (2007)

Good Billions of Dollars of Imports

Petroleum 361.0

Industrial Eq 250.2

Elec. Mach. Aud & Video 248.9

Motor Vehicles 214.5

Optics 53.8

Services 378.1

Total 2,346.0

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With Whom We Trade

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Comparative and Absolute Advantage

• Absolute Advantage: the ability to produce a good better, faster, or more quickly than a competitor

• Comparative Advantage: the ability to produce a good at a lower opportunity cost of the resources used

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The Benefits of Trade: When Comparative and Absolute Advantage are the same

Coffee Apples

United States

1 2

Brazil 2 1

Suppose there are two countries, the United States and Brazil, and two goods, Apples and Coffee, and the production per unit of labor is shown in the table below.

Clearly, there are benefits from trade. If the Americans focus on apples and the Brazilians focus on coffee and they trade with one another, more apples and more coffee is available to both countries.

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The Benefits of Trade: When Comparative and Absolute

Advantage are Not the same

Coffee Apples

United States

3 2

Brazil 2 1

Now suppose the Americans are better at producing both goods. The Americans have an absolute advantage in both but a comparative advantage in only Apples.

There are still benefits from trade. If the Americans focus on apple production and the Brazilians focus on coffee production and they trade with one another more apples and coffee is available to both countries.

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Terms-of-trade

• The amount of a good one country must give up in order to obtain another good from the other country, usually expressed as a ratio.

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Using Production Possibilities Frontiers

Apples

Coffee

Apples

Coffee

Brazil United States

Production Possibilities Frontier

Production

Possibilities Frontier

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Consumption Possibilities Frontier with Trade

Apples

Coffee

Consumption Possibilities Frontier

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Reasons For Limiting Trade That Many Economists

Support• National Security• National Identity

– Both of the above can be overstated easily.

• Environmental Concerns• Child-Labor Concerns

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Reasons for Limiting Trade that Most Economists Do Not Support

• To protect industries from competition– To temporarily aid an industry that

is just emerging.– To protect an industry from

competition that is dumping (the exporting of goods below cost so as to drive competitors out-of-business) its products in the US.

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Methods of Limiting Trade

• Tariffs: a tax on imports• Quotas: a legal restriction on

the amount of a good coming into the country

• Non-tariff barriers: barriers to trade that result from regulatory actions

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Cost of Limiting Trade

Q/t

S

D

P

Q/t

Domestic Market

Pworld

S

D

PWorld Market

Pworld

Pdomestic

Qd

A

B

C

Q’s Q’d

EF

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Tariffs vs. Quotas

Plimit

C

A

B

E

P

Q/t

D

S

P*

Q*Qlimit

Limiting trade with a quota

S’

}Tariff

FLimiting trade with a tariffA tariff raises tax revenue and a quota does not.

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Costs of Protection

• Whether there is a quota or a tariff there is deadweight loss. This means that the gainers (the people who keep their jobs) gain less than the losers (the people who have to pay higher prices) lose.

• The average cost per job saved via trade barriers is estimated to be $169,000 per year.

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Trade as a Diplomatic Weapon

• Trade sanctions have failed– To get Castro out of Cuba– To get Iran to release our

hostages in 1979-1980.– To get the Soviet Union out of

Afghanistan.– To get Iraq out of Kuwait in

1990.