Why Trade? 1. There is uneven distribution of natural
resources. 2. Efficient production of goods requires different
technologies and combinations of resources 3. Produce items that
differ in quality Results of the trade: 1. Specialization which
increases productivity and are able to purchase more goods and
services comparative advantage v. absolute advantage 2. Supplement
your domestic PPC with a new trading possibilities line
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PPC for two countries CountryOutput before specialization USA18
wheat 12 coffee Brazil8 wheat 4 coffee
Slide 6
Specialization If the United States and Brazil specialize in
the good in which they hold the comparative advantage:
CountryOutputs before specialization Outputs after specialization
USA18 Wheat30 wheat 12 coffee0 coffee Brazil8 wheat0 wheat 4
coffee20 coffee
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World trade analysis Who Benefits? Consumers can buy more and
different products at a lower price Domestic Industries Export
industries Who is hurt? Import competing firms Domestic consumers
of export industries Mobility of capital and workers
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International Flows of Goods & Capital 2 Closed economy -
does not interact with other economies in the world Open economy -
interacts freely with other economies around the world
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Flow of goods: exports, imports,& net exports 3 Exports
domestically produced goods and services that are sold abroad
Imports - goods and services produced abroad sold domestically
Slide 10
Trade Barriers Revenue TariffsTaxes placed on imported goods
not produced domestically Protective TariffsTaxes placed on goods
to shield domestic producers from foreign competition Import
QuotasQuantity restrictions on imported goods Voluntary Trade
RestrictionsQuotas that an exporting country places on its own
products Government subsidyPayments to domestic companies which
allows for production at a lower cost NON TARIFF BARRIERS Product
Standards and RegulationsHealth and safety rules to guarantee
minimum standard of quality which are often disguising an import
quota Red TapeBureaucracy involved in exporting products to a
particular country licensing DumpingCharging a price for an
exported good that is below the actual cost of production to
undercut the competition
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Slide 12
Protectionism and Free Trade
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Economic Impact of Tariffs Direct effects: 1. Decline in
consumption since the price is higher with less competition 2.
Increased domestic production spurred by the higher price in the
market 3. Decline in imports caused by lower consumption of the
foreign good 4. Government gains portion of what consumers lose by
paying more for the good Indirect Effects 1.Promote the expansion
of inefficient industries which do not have the comparative
advantage and cause the contraction of those industries which do
have the comparative advantage