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  1. 1. InternationalTradeChapter 37McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. Chapter Objectives• Comparative advantage and thegains from trade• Exports and imports• Economic effects of tariffs andquotas• Arguments for protectionism37-2
  3. 3. Some Key Facts• U.S. trade deficit in goods–$815 billion in 2007• U.S. trade surplus in services–$107 billion in 2007• Canada largest U.S. trade partner• Trade deficit with China–$257 billion in 2007• Exports are 12% U.S. output• Dependence on oil 37-3
  4. 4. World ExportsGermanyUnited StatesChinaJapanFranceNetherlandsUnited KingdomItaly0 2 4 6 8 10 129.208.598.025.384.063.833.713.40Source: World Trade OrganizationPercentage Share of World Exports,Selected Nations, 200737-4
  5. 5. Economic Basis for Trade• Nations have different resourceendowments• Labor-intensive goods• Land-intensive goods• Capital-intensive goods37-5
  6. 6. Comparative Advantage• Assumptions–Two nations–Same size labor force–Constant costs in each country–Different costs across countries–U.S. absolute advantage in both• Opportunity cost ratio–Slope of the curve–Coffee sacrificed per ton of wheat37-6
  7. 7. Coffee(Tons)3025201510503540455 10 15 20 25 30Wheat (Tons)Coffee(Tons)3025201510503540455 10 15 20Wheat (Tons)(a) United States (b) Brazil1218 84ABComparative Advantage37-7
  8. 8. • Self-sufficiency output mix• Specialization and trade• Produce good with lowestdomestic opportunity cost• Opportunity cost 1 ton wheat–1 pound of coffee in U.S.–2 pounds of coffee in BrazilComparative Advantage37-8
  9. 9. • Terms of trade–U.S. 1W = 1C–U.S. will sell 1W for more than 1C–Brazil 1W = 2C–Brazil will pay less than 2C for 1W–Settle between the two–Depends on supply/demand factors–Assume 1W = 1.5CComparative Advantage37-9
  10. 10. • Gains from trade–Trade possibilities line–Slope equals terms of trade–Improved options• Complete specialization• More of both goods• More efficient resource allocationComparative Advantage37-10
  11. 11. Economic Basis for TradeCoffee(Tons)3025201510503540455 10 15 20 25 30Wheat (Tons)Coffee(Tons)3025201510503540455 10 15 20Wheat (Tons)(a) United States (b) Brazil1218 84ABA’B’CC’Wcw w’TradingPossibilities LineTradingPossibilities Line37-11
  12. 12. Comparative Advantage• Trade with increasing costs–Concave production curve–Resources not perfectlysubstitutable–Incomplete specialization• The case for free trade–Promote efficiency–Promote competition37-12
  13. 13. Supply and Demand Analysis• World price• Domestic price with no trade• World price > domestic price–Export surplus–Export supply curve• World price < domestic price–Import shortage–Import supply curve37-13
  14. 14. Price(PerPound;U.S.Dollars1.501. 75 100 125 150Quantity of Aluminum(Millions of Pounds)1.501. 100Quantity of Aluminum(Millions of Pounds)Price(PerPound;U.S.Dollars(a) U.S. DomesticAluminum Market(b) U.S. Export Supplyand Import DemandDdSdU.S.ExportSupplyU.S.ImportDemandabcxySurplus = 50Surplus = 100Shortage = 50Shortage = 100Supply and Demand Analysis37-14
  15. 15. Supply and Demand AnalysisPrice(PerPound;U.S.Dollars1.501. 75 100 125 150Quantity of Aluminum(Millions of Pounds)1.501. 100Quantity of Aluminum(Millions of Pounds)Price(PerPound;U.S.Dollars(a) Canada’s DomesticAluminum Market(b) Canada’s Export Supplyand Import DemandDdSdCanadianExportSupplyCanadianImportDemandqrstSurplus = 50Surplus = 100Shortage = 5037-15
  16. 16. International Equilibrium1.00.75.88050 100Quantity of Aluminum(Millions of Pounds)Price(PerPound;U.S.DollarsImport demand = Export supplyCanadianExportSupplyCanadianImport DemandeU.S.ExportSupplyU.S.ImportDemandEquilibrium37-16
  17. 17. Trade Barriers• Tariffs–Revenue tariff–Protective tariff• Import quota• Nontariff barrier (NTB)• Voluntary export restriction(VER)37-17
  18. 18. Trade Barriers• Economic impact of tariffs• Direct effects–Decline in domestic consumption–Increase in domestic production–Decline in imports–Tariff revenue• Indirect effects37-18
  19. 19. Trade BarriersQuantityPrice0DdSdPdqSd + QPtPwa b c dEconomic Effects of a Tariff or Quota37-19
  20. 20. The Case for Protection• Different arguments• Military self-sufficiency• Diversification for stability• Infant industry• Protection against dumping• Increased domestic employment• Cheap foreign labor37-20
  21. 21. The WTO Protests• World Trade Organization has151 member nations–Liberalize trade through negotiation• Protest groups–Labor unions, environmentalists,socialists, anarchists• Key issues for the protestors–Labor protection and environmentalstandards37-21
  22. 22. Key Terms• labor-intensive goods• land-intensive goods• capital-intensive goods• opportunity-cost ratio• principle of comparativeadvantage• terms of trade• trading possibilities line• gains from trade• world price• domestic price• export supply curve• import demand curve• equilibrium world price• tariffs• revenue tariff• protective tariff• import quota• nontariff barrier (NTB)• voluntary export restriction(VER)• strategic trade policy• dumping• Smoot-Hawley Tariff Act• World Trade Organization(WTO)• Doha Round37-22
  23. 23. Next Chapter Preview…Exchange Rates, theBalance of Payments,and Trade Deficits37-23