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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 17 ECON4 William A. McEachern
1
International
Trade
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Gains from Trade
• Law of comparative advantage
– The individual with the lowest opportunity
cost of producing a particular good
– Should specialize in that good
• Each country specializes
– In making goods with the lowest
opportunity cost
2
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Gains from Trade
• U.S. exports
– $2.2 trillion (14% of GDP) in 2012
– Services (29% of U.S. exports)
• U.S. imports
– $2.7 trillion (17% of GDP) in 2012
– Industrial supply (27% of U.S. imports)
3
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 1
4
Composition of U.S. Exports and Imports in 2012
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Gains from Trade
• U.S. trading partners, 2010
– Top 10 destinations for merchandise
exports
• Canada, Mexico, China, Japan, United
Kingdom, Germany, Brazil, South Korea, the
Netherlands, and France
– Top 10 sources of merchandise imports
• China, Canada, Mexico, Japan, Germany,
United Kingdom, South Korea, France, India,
and Taiwan
5
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Production Possibilities without Trade
• Production possibilities
– With existing resources
• No trade
– Production possibilities = consumption
possibilities
• Production possibilities frontiers
– Straight lines
– Different slopes – different opportunity
costs
6
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 2
7
Production Possibilities Schedules for the U.S. and Izodia
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 3
8
Production Possibilities Frontiers for the United States and
Izodia Without Trade (millions of units per day)
100
200
300
400
500
600
Fo
od
(a) United States
U1
U2
U3
U5
100 200 300 400 Clothing0
100
200
300
400
500
600
Food
(b) Izodia
I1 I2I4
I5
100 200 300 400 Clothing0
Panel (a) shows the U.S. production possibilities frontier; its slope indicates that the
opportunity cost of an additional unit of clothing is 2 units of food. Panel (b) shows
production possibilities for Izodia; an additional unit of clothing costs 1/2 unit of food.
Clothing has a lower opportunity cost in Izodia.
U4
U6
I3
I6
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Consumption Possibilities
• Gains from specialization and trade
– Each country should specialize
• Producing the good with the lower
opportunity cost
• Terms of trade
– How much of one good exchanges for a
unit of another good
9
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Consumption Possibilities
• Consumption possibilities frontier
– Possible combinations of goods
• As result of specialization and exchange
– Depend on relative preferences
• For each good
– World production must equal world
consumption
10
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 4
11
Production (and Consumption) Possibilities Frontiers With
Trade (millions of units per day)
100
200
300
400
500
600
Food
(a) United States
100 200 300 400 Clothing0
100
200
300
400
500
600
Food
(b) Izodia
100 200 300 400 Clothing0
U
I
If Izodia and the United States can specialize and trade at the rate of 1 unit of clothing for 1 unit of
food, both can benefit as shown by the blue lines. By trading with Izodia, the U.S. can produce
only food and still consume combination U, which has more food and more clothing than U4.
Likewise, Izodia can attain preferred combination I by trading some clothing for U.S. food.
I3
U4
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Reasons for Specialization
• Differences in resource endowments
– Create differences in opportunity cost
– Countries export goods
• Produce more cheaply
– Countries import
• Products unavailable domestically
• Cheaper elsewhere
12
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 5
13
U.S. Production as a Percentage of U.S.
Consumption for Various Resources
If U.S. production is less than 100 percent of U.S. consumption, then imports make up the
difference. If U.S. production exceeds U.S. consumption, then the amount by which
production exceeds 100 percent of consumption is exported.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Reasons for Specialization
• Economies of scale
– Firms produce more
– Reducing average costs
• Differences in tastes
– Differences in consumption patterns
14
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Consumer and Producer Surplus
• Demand: marginal benefit
• Consumer surplus
– Difference between what consumer
would pay and what they pay
• Supply: marginal cost
• Producer surplus
– Difference between actual amount
received and what they would accept
15
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 6
16
Consumer Surplus and Producer Surplus
0 60Apples
(pounds per day)
S
D
Consumer
surplus
Producer
surplus1.00
0.50Price p
er
pound 2.00
$3.00
Consumer surplus, shown by the blue
triangle, indicates the net benefits
consumers reap from buying 60 pounds
of apples at $1.00 per pound. Some
consumers would have been willing to
pay $3.00 or more per pound for the
first few pounds. Consumer surplus
measures the difference between the
maximum sum of money consumers
would pay for 60 pounds of apples and
the actual sum they pay. Producer
surplus, shown by the gold triangle,
indicates the net benefits producers
reap from selling 60 pounds at $1.00
per pound. Some producers would have
supplied apples for $0.50 per pound or
less. Producer surplus measures the
difference between the actual sum of
money producers receive for 60 pounds
of apples and the minimum amount they
would accept for this amount.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Trade Restrictions
• Tariff: Tax on imports
– Specific: $ amount per unit
– Ad valorem: Percentage per unit
– Effects
• Loss of consumer surplus
• Increase in producer surplus
• Increase in government revenue
• Net loss in domestic social welfare
17
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 7
18
Effect of a Tariff
$0.15
0.10
Price
per
pound S
D
0 30
Sugar (millions of pounds per month)
20 60 70
a b c d
f
At a world price of $0.10 per pound,
U.S. consumers demand 70 million
pounds of sugar per month, and U.S.
producers supply 20 million pounds
per month; the difference is imported.
After the imposition of a $0.05 per
pound tariff, the U.S. price rises to
$0.15 per pound. U.S. producers
supply 30 million pounds, and U.S.
consumers cut back to 60 million
pounds. At the higher U.S. price,
consumers are worse off; their loss of
consumer surplus is the sum of areas
a, b, c, and d. The net welfare loss to
the U.S. economy consists of areas b
and d.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Trade Restrictions
• Import quotas: Legal limit on the amount
of a commodity that can be imported
– Target imports from certain countries
– Effects
• Raise the US price above the world price
• Reduce quantity below the free-trade level
• Lower consumer surplus
• Increase in producer surplus
• Net loss in domestic social welfare
19
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 8
20
Effect of a Quota
S’
$0.15
0.10
Pri
ce
per
pound
S
D
0 Sugar
(millions of pounds per month)20 50 70
$0.15
0.10
Pri
ce
per
pound
S
D
0 30 Sugar
(millions of pounds per month)20 60 70
a b c d
S’
e
In panel (a), D is the U.S. demand curve and S is the supply curve of U.S. producers. If the government
establishes a sugar quota of 30 million pounds per month, the supply curve combining U.S. production and
imports becomes horizontal at the world price of $0.10 per pound and remains horizontal until the quantity
supplied reaches 50 million pounds. For higher prices, the new supply curve equals the horizontal sum of
the U.S. supply curve, S, plus the quota of 30 million pounds. The new U.S. price, $0.15 per pound, is
determined by the intersection of the new supply curve, S, with the U.S. demand curve, D. Panel (b) shows
the welfare effect of the quota. As a result of the higher U.S. price, consumer surplus is cut by the shaded
area. The blue-shaded areas illustrate the loss in consumer surplus that is captured by domestic producers
and those who are permitted to fulfill the quota, and the pink-shaded triangles illustrate the net welfare cost
of the quota on the U.S. economy.
(a) (b)
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Trade Restrictions
• Quotas in practice
– Rewards domestic and foreign producers
with higher prices
– Lobbyists for foreign producers
• Seek the right to export to U.S.
– Auction off the quotas
• Increase federal revenue
• Reduce pressure to perpetuate quotas
21
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Trade Restrictions
• Comparison: Tariffs and Quotas
– Similarities
• Higher price, Lower quantity demanded
• Loss of consumer surplus (U.S. consumers)
• Gain of producer surplus (U.S. producers)
• Lower economic welfare
– Differences
• Revenue from tariff – to U.S. government
• Revenue from quota - to quota rights’ owner
22
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Other Trade Restrictions
• Export subsidies - to encourage exports
• Domestic content requirements
– A certain portion of a final good must be
produced domestically
• Other requirements
– Health, Safety, Technical standards
– Discriminate against foreign goods
• Trade restrictions
– Slow economic progress23
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Multilateral Agreement
• General Agreement on Tariffs and
Trade, GATT:
– 1947, 23 countries
• Reduce tariffs
• Reduce import quotas
• Equal trade
– 1986, “Uruguay Round”
• Now exceeds 150 countries
• Successor: WTO
24
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The World Trade Organization
• Legal and institutional foundation for
world trade
• 500 economists and lawyers
• Trade
– Merchandise
– Services
– Intellectual property
• Phase out quotas, keep only tariffs
25
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Common Markets
• U.S. economy
– Free trade zone across 50 states
• European Union
– 27 countries in 2010
– Barrier-free European market
– 16 members: common currency – Euro
• North American Free Trade Agreement
– United States, Canada, Mexico
26
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Common Markets
• DR-CAFTA
– U.S, Dominican Republic, five Central
American countries
• Mercosur
– Latin American countries
• ASEAN
– Southeast Asian nations
• Southern African Customs Union
– South Africa and four neighbors 27
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Arguments for Trade Restrictions
• National defense argument
– Domestic industry’s output is vital to
national defense
– More efficient
• Government subsidies
• Stockpile basic military hardware
28
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Arguments for Trade Restrictions
• Infant industry argument
– Protect emerging domestic industries
– Foster inefficiencies
– Cost: net welfare loss from higher
domestic prices
– More efficient
• Temporary production subsidies
29
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Arguments for Trade Restrictions
• Antidumping argument
– Dumping: sell a product abroad for less
than in the home market
• Persistent
– Consumers - pay less
– Increase consumer surplus
• Predatory
– Temporary; eliminate competitors
• Sporadic
– “sales”
30
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Arguments for Trade Restrictions
• Jobs and income argument
– Protect domestic jobs
– Retaliation
– Great Depression: high tariffs choked
trade and jobs
• Declining industries argument
– Help lessen shocks to the economy
– Specific duration
31
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Problems with Trade Protection
• Protect one stage of production
– Protect downstream stages
• Cost of protection
– Welfare loss, Cost of rent seeking
• Transaction cost of enforcing restrictions
– Black markets
• Less efficient, less innovative
• Retaliation
32