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Macro ch9
 

Macro ch9

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    Macro ch9 Macro ch9 Presentation Transcript

    • International Trade Policy, Comparative Advantage, and Outsourcing 9 CHAPTER 9International Trade Policy, ComparativeAdvantage, and Outsourcing One of the purest fallacies is that trade follows the flag. Trade follows the lowest price current. If a dealer in any colony wished to buy Union Jacks, he would order them from Britain’s worst foe if he could save a sixpence. — Andrew Carnegie
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Chapter Goals• Present some important data of trade• Explain the principle of comparative advantage• Discuss three determinants of the terms of trade• Explain why economists’ and laypeople’s views of trade differ 9-2
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Chapter Goals• Distinguish between inherent and transferable comparative advantages• Discuss three policies countries use to restrict trade• Explain why economists generally oppose trade restrictions• Explain how free trade associations both help and hinder international trade 9-3
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Patterns of Trade Differences in the importance of trade Total Output ($) Export Ratio (%) Import Ratio (%)Netherlands 754 74 66Germany 3,279 45 40Canada 1,326 38 34Italy 2,107 28 29France 2,562 27 28United Kingdom 3,280 29 33Japan 4,377 14 13United States 14,264 11 16 9-4
    • International Trade Policy, Comparative Advantage, and Outsourcing 9U.S. Exports by Region, 2008 9-5
    • International Trade Policy, Comparative Advantage, and Outsourcing 9U.S. Imports by Region, 2008 9-6
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 The Changing Nature of Trade• The nature of trade is continually changing, both in terms of the countries with which the U.S. trades and the goods and services traded• As technological changes in telecommunications reduce costs, foreign countries will be able to provide more services• Customer service calls for U.S. companies are now more frequently answered in India• This trade in services is often called outsourcing 9-7
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 The Changing Nature of Trade Is Chinese and Indian outsourcing different than previous outsourcing?• Using overseas suppliers is not a new development in trade• The difference is the potential size of outsourcing to India and China with combined populations of 2.5 billion people• Because technology is growing in these countries, the U.S. economy must develop new technologies to remain competitive 9-8
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Balance of Trade• The balance of trade is the difference between the value of exports and the value of imports • Trade deficit = exports < imports • Trade surplus = exports > imports• The U.S. has a significant trade deficit of approximately $820 billion which is 5.5% of GDP• The U.S. is financing its trade deficit by selling off financial assets, stocks and bonds, and real assets, corporations and real estate 9-9
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Balance of TradePercent of GDP 2 1 The United States has 0 been running trade deficits -1 since the 1970s -2 -3 -4 -5 -6 -7 1970 1980 1990 2000 2010 9-10
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Debtor and Creditor Nations• Running a deficit isn’t necessarily bad• The U.S. is currently financing its trade deficit by selling off assets• The U.S. has not always had a trade deficit, following WWII, it had trade surpluses• The U.S. has gone from a large creditor nation to being a large debtor nation, international considerations have been forced on the nation 9-11
    • International Trade Policy, Comparative Advantage, and Outsourcing 9The Principle of Comparative Advantage• The principle of comparative advantage is that as long as the relative opportunity costs of producing goods differ among countries, then there are potential gains from trade• Opportunity cost is what must be given up in one good in order to get another good 9-12
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Application: Comparative Advantage United States Saudi Arabia % of Oil Food % of Oil Food resources produced produced resources produced produceddevoted to oil (barrels) (tons) devoted to oil (barrels) (tons) 100 100 0 100 1,000 0 80 80 200 80 800 20 60 60 400 60 600 40 40 40 600 40 400 60 20 20 800 20 200 80 0 0 1,000 0 0 100Who has comparative advantage in production of oil? Food? 9-13
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Application: Comparative Advantage PPF : United States PPF : Saudi Arabia Oil Oil The U.S. has comparative Saudi Arabia has advantage in food 1,000 comparative advantage in oil because it has a lower because it has a lower opportunity cost (in terms opportunity cost (in terms of 800 of oil) to produce food food) to produce oil100 The U.S. should Saudi Arabia 600 produce 1,000 should produce80 tons of food 1,000 barrels of oil60 40040 20020 200 400 600 800 1,000 Food 20 40 60 80 100 Food 9-14
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Application: The Gains from Trade• A trader, I.T., arranges for Saudi Arabia to trade 500 barrels of oil to the U.S. for 120 tons of food• The U.S. will trade 500 tons of food to Saudi Arabia for 120 barrels of oil• I.T. keeps 380 barrels of oil and 380 tons of food Production Consumption U.S. Saudi Arabia U.S. Saudi Arabia I.T.Oil (barrels) 0 1,000 120 500 380Food (tons) 1,000 0 500 120 380 9-15
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Application: The Gains from Trade PPF : United States PPF : Saudi Arabia Oil Oil After trade, the U.S. can After trade, Saudi Arabia can 1,000 consume beyond its PPF consume beyond its PPF 800120100 6008060 40040 20020 200 400 600 800 1,000 Food 20 40 60 80 100 120 Food 9-16
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Dividing Up the Gains from TradeThree determinants of the terms of trade are: 1. The more competition among traders, the less the trader gets 2. Smaller countries get a larger proportion of the gain than larger countries 3. Countries producing goods with economies of scale get a larger gain from trade 9-17
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Comparative Advantage in Today’s EconomyIf trade is good, why do so many people oppose it? • The gains of trade, lower prices, are harder to see than the cost, lost jobs • The public believes that lower wages in other countries give them the comparative advantage in everything, so we will lose all jobs • Laypeople often think of trade as trade only in manufactured goods 9-18
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Comparative Advantage in Today’s Economy• The U.S. has a comparative advantage in facilitating trade, which generates jobs in the United States in research, management, advertising, and the distribution of goods• Trade increases income abroad, increasing demand for U.S. exports• The concentrated nature of the costs of trade and the dispersed nature of benefits present a challenge to policy makers 9-19
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Other Sources of Comparative Advantage• U.S. physical and technological infrastructure is the best in the world• Wealth from past production and borrowing allows the U.S. to be the world’s largest consumer• U.S. companies hold a large number of intellectual property rights• The U.S. has a relative open immigration policy 9-20
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Some Concerns about the Future Inherent and transferable comparative advantage• Inherent comparative advantages are based on factors that are relatively unchangeable, such as resources and climate• Transferable comparative advantages are based on factors that can change relatively easily, such as capital, technology, and types of labor• Whether a country can maintain a much higher standard of living in the long run depends in part on whether its comparative advantage is inherent or transferable 9-21
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Some Concerns about the Future The law of one price• The law of one price means that in a competitive market there will be pressure for equal factors to be priced equally• If factor prices aren’t equal, firms reduce costs by reorganizing production in countries with lower factor prices• The convergence hypothesis is the tendency of economic forces to eliminate transferable comparative advantage. 9-22
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Some Concerns about the Future Methods of equalizing trade balances• Adjustments eventually occur to make surplus countries less competitive and deficit countries more competitive• Wages rise in the surplus countries, making their goods more expensive• The exchange rate of the deficit country falls and makes its goods less expensive 9-23
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Varieties of Trade Restrictions• Tariffs are taxes governments place on internationally traded goods (generally imports)• Quotas are quantity limits placed on imports• Voluntary restraint agreements are when countries voluntarily restrict their exports• An embargo is a total restriction on the import or export of a good• Regulatory trade restrictions are government-imposed procedural rules that limit imports• Nationalistic appeals, such as “Buy American” can help to restrict international trade 9-24
    • International Trade Policy, Comparative Advantage, and Outsourcing 9Application: Tariffs when the domestic country is small P Tariffs decrease imports, increase domestic production, and generate tariff revenue Tariff revenue SDomestic $3.00 $2.50 PWorld + $0.50Tariff = S’World $2.00 PWorld = SWorld Imports’ DDomestic Q Imports 9-25
    • International Trade Policy, Comparative Advantage, and Outsourcing 9Application: Quotas when the domestic country is small P Quotas decrease imports and increase domestic production SDomestic $3.00 $2.50 Quota = S’World $2.00 PWorld = SWorld Quota = 50 DDomestic Q Imports w/o quota 9-26
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Reasons for Trade Restrictions• Unequal internal distribution of the gains from trade• Haggling by companies over the gains from trade• Haggling by countries over trade restrictions• Specialized production • Learning by doing and economies of scale• Macroeconomic aspects of trade• National security• International politics• Increased revenue brought in by tariffs 9-27
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Why Economists Generally Oppose Trade Restrictions• From a global perspective, free trade increases total output• International trade provides competition for domestic companies• Restrictions based on national security are often abused or evaded• Trade restrictions are addictive 9-28
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Institutions Supporting Free Trade• The World Trade Orgainization (WTO) has about 150 members• Free trade associations are groups of nations that allow free trade among members and put up trade barriers against all other nations. • E.g. the European Union (EU) and the North American Free Trade Association (NAFTA)• Countries strengthen trading relationships with most- favored nation status – those countries will be charged as low a tariff on exports as any other country 9-29
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Chapter Summary• The nature of trade is continually changing• The U.S. is importing more and more high-tech goods and services from India and China and other East Asian countries• Outsourcing, a form of trade, is a larger phenomenon today compared to 30 years ago because the countries where jobs are outsourced – China and India – are much larger 9-30
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Chapter Summary• According to the principle of comparative advantage, as long as the relative opportunity costs of producing goods differ among countries, there are potential gains from trade• The more competition exists in international trade, the less the trader gets and the more the involved countries get• Once competition prevails, smaller countries tend to get a larger percentage of the gains from trade than do larger countries• Gains from trade go to countries that produce goods that exhibit economies of scale 9-31
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Chapter Summary• The gains from trade in the form of low consumer prices tend to be widespread and not easily recognized, while the costs in jobs lost tend to be concentrated and readily identifiable• The United States has comparative advantages due to its skilled workforce, its institutions, and its language, among other things• The U.S. established comparative advantages during the two world wars, which are slowly eroding 9-32
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Chapter Summary• Trade restrictions include tariffs and quotas, embargoes, voluntary restraint agreements, regulatory trade restrictions, and nationalistic appeals• Economists generally oppose trade restrictions because of the history of trade restrictions and their understanding of the advantages of free trade• The World Trade Organization is an international organization committed to reducing trade barriers• Free trade associations, such as the European Union, help trade by reducing barriers to trade among member nations 9-33
    • International Trade Policy, Comparative Advantage, and Outsourcing 9 Preview of Chapter 10: The Logic of Individual Choice: The Foundation of Supply and Demand• Discuss the principle of diminishing marginal utility• Summarize the principle of rational choice• Explain the relationship between marginal utility and price when a consumer is maximizing total utility• Explain how the principle of rational choice accounts for the laws of supply and demand• Name three assumptions of the theory of choice and discuss why they may not reflect reality• Give an example of how behavioral economics changes the assumption of utility maximization 9-34