The document discusses arguments around using trade policy to help domestic industries. It notes that while trade restrictions may preserve jobs in some industries, they ultimately reduce jobs in other industries by making the country less competitive overall. The document also covers topics like comparative advantage, gains from trade, different government trade policies, and debates around free trade agreements and globalization.

2. Is Using Trade Policy to Help U.S. Industries a Good Idea? Learning Objectives Restrictions on trade may preserve jobs in particular industries, but only at the cost of reducing jobs in other industries. APPENDIX Understand why firms operate in more than one country . Evaluate the arguments over trade policy and globalization . 6.5 Analyze the economic effects of government policies that restrict international trade . 6.4 Explain how countries gain from international trade. 6.3 Understand the difference between comparative advantage and absolute advantage in international trade. 6.2 Discuss the role of international trade in the U.S. economy . 6.1

3. The United States in the International Economy Tariff A tax imposed by a government on imports. Learning Objective 6.1 Imports Goods and services bought domestically but produced in other countries. Exports Goods and services produced domestically but sold to other countries.

4. The United States in the International Economy Learning Objective 6.1 The Importance of Trade to the U.S. Economy FIGURE 6-1 International Trade is of Increasing Importance to the United States

5. The United States in the International Economy Learning Objective 6.1 FIGURE 6-2 The Eight Leading Exporting Countries U.S. International Trade in a World Context

6. The United States in the International Economy Learning Objective 6.1 FIGURE 6-3 International Trade as a Percentage of GDP U.S. International Trade in a World Context

7. How Expanding International Trade Has Helped Boeing Learning Objective 6.1 Rapid growth of international trade spurred demand for the 747 because it has larger cargo capacity than other planes. Making the Connection

8. Comparative Advantage in International Trade Learning Objective 6.2 A Brief Review of Comparative Advantage Comparative advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Opportunity Cost The highest valued alternative that must be given up to engage in an activity. Comparative Advantage in International Trade Table 6-1 An Example of Japanese Workers Being More Productive Than American Workers OUTPUT PER HOUR OF WORK 4 2 UNITED STATES 6 12 JAPAN DIGITAL MUSIC PLAYERS CELL PHONES

9. Comparative Advantage in International Trade Learning Objective 6.2 Absolute advantage The ability to produce more of a good or service than competitors when using the same amount of resources. Table 6-2 The Opportunity Costs of Producing Cell Phones and Digital Music Players Comparative Advantage in International Trade 0.5 cell phone 2 digital music players UNITED STATES 2 cell phones 0.5 digital music player JAPAN DIGITAL MUSIC PLAYERS CELL PHONES OPPORTUNITY COSTS

10. How Countries Gain from International Trade Learning Objective 6.3 Autarky A situation in which a country does not trade with other countries. Table 6-3 Production without Trade Increasing Consumption through Trade Terms of trade The ratio at which a country can trade its exports for imports from other countries. 1,000 1,500 UNITED STATES 1,500 9,000 JAPAN DIGITAL MUSIC PLAYERS CELL PHONES PRODUCTION AND CONSUMPTION

11. How Countries Gain from International Trade Learning Objective 6.3 Table 6-4 Increasing Consumption through Trade The Gains from Trade for Japan and the United States CELL PHONES MP3 PLAYERS CELL PHONES 1,500 MP3 Players United States The increased consumption made possible by trade represents the gains from trade. 1,500 Cell Phones Japan Increased Consumption GAINS FROM TRADE ...and export some of that good in exchange for the good the other country has a comparative advantage in producing. With trade, the United States and Japan specialize in the good they have a comparative advantage in producing... 2,500 1,500 Export 1,500 Import 1,500 4,000 0 United States 1,500 10,500 Import 1,500 Export 1,500 0 12,000 Japan MP3 PLAYERS CELL PHONES MP3 PLAYERS MP3 PLAYERS CELL PHONES Consumption with Trade Trade Production with Trade WITH TRADE 1,000 1,500 United States 1,500 9,000 Japan Production and Consumption WITHOUT TRADE

12. The Gains from Trade Learning Objective 6.3 Solved Problem 6-3 WITHOUT TRADE 123,000 18,000 18,000 63,000 Portugal England WINE CLOTH PRODUCTION AND CONSUMPTION GAINS FROM TRADE 9,000 wine 9,000 cloth Portugal England INCREASED CONSUMPTION 18,000 72,000 Import 18,000 Export 18,000 0 90,000 ENGLAND 132,000 18,000 Export 18,000 Import 18,000 150,000 0 PORTUGAL WINE CLOTH WINE CLOTH WINE CLOTH CONSUMPTION WITH TRADE TRADE PRODUCTION WITH TRADE WITH TRADE

13. How Countries Gain from International Trade Learning Objective 6.3 Don’t Let This Happen to YOU! Remember That Trade Creates Both Winners and Losers Not all goods and services are traded internationally. Production of most goods involves increasing opportunity costs. Tastes for products differ. Why Don’t We See Complete Specialization? Does Anyone Lose as a Result of International Trade?

14. How Countries Gain from International Trade Learning Objective 6.3 Climate and natural resources. Relative abundance of labor and capital. Technology. External economies. Where Does Comparative Advantage Come From? External economies Reductions in a firm’s costs that result from an increase in the size of an industry.

15. Why Is Dalton, Georgia, the Carpet- Making Capital of the World? Learning Objective 6.3 Because Catherine Evans Whitener started making bedspreads by hand in Dalton, Georgia, 100 years ago, a multibillion-dollar carpet industry is now located there. Making the Connection

16. How Countries Gain from International Trade Learning Objective 6.3 Comparative Advantage Over Time: The Rise and Fall—and Rise—of the U.S. Consumer Electronics Industry Once a country has lost its comparative advantage in producing a good, its income will be higher and its economy will be more efficient if it switches from producing the good to importing it.

17. Government Policies That Restrict International Trade Learning Objective 6.4 Free trade Trade between countries that is without government restrictions. Figure 6-4 The U.S. Market for Ethanol under Autarky

18. Government Policies That Restrict International Trade Learning Objective 6.4 Figure 6-5 The Effect of Imports on the U.S. Ethanol Market

19. Government Policies That Restrict International Trade Learning Objective 6.4 Figure 6-6 The Effects of a Tariff on Ethanol Tariffs

20. Government Policies That Restrict International Trade Learning Objective 6.4 Quotas and Voluntary Export Restraints Quota A numeric limit imposed by a government on the quantity of a good that can be imported into the country. Voluntary export restraint (VER) An agreement negotiated between two countries that places a numeric limit on the quantity of a good that can be imported by one country from the other country.

21. Government Policies That Restrict International Trade Learning Objective 6.4 Quotas and Voluntary Export Restraints Figure 6-7 The Economic Effect of the U.S. Sugar Quota

22. Government Policies That Restrict International Trade Learning Objective 6.4 Measuring the Economic Effect of the Sugar Quota We can use the concepts of consumer surplus, producer surplus, and deadweight loss to measure the economic impact of the sugar quota.

23. Measuring the Economic Effect of a Quota Learning Objective 6.4 Solved Problem 6-4 $10 $12 10 million boxes 14 million boxes 4 million boxes A+B G+C D+F $10 $10 6 million boxes 16 million boxes 10 millions boxes A+B+C+D+E+F G No deadweight loss World price of apples U.S. price of apples Quantity supplied by U.S. firms Quantity demanded by U.S. consumers Quantity imported Area of consumer surplus Area of domestic producer surplus Area of deadweight loss WITH QUOTA WITHOUT QUOTA

24. Government Policies That Restrict International Trade Learning Objective 6.4 The High Cost of Preserving Jobs with Tariffs and Quotas Table 6-5 Preserving U.S. Jobs with Tariffs and Quotas Is Expensive $1,376,435 1,285,078 1,044,271 685,323 635,103 603,368 479,452 263,535 257,640 216 226 605 2,378 609 146 1,556 773 390 Benzenoid chemicals Luggage Softwood lumber Dairy products Frozen orange juice Ball bearings Machine tools Women's handbags Canned tuna COST TO CONSUMERS PER YEAR FOR EACH JOB SAVED NUMBER OF JOBS SAVED PRODUCT

25. Government Policies That Restrict International Trade Learning Objective 6.4 The High Cost of Preserving Jobs with Tariffs and Quotas Table 6-6 Preserving Japanese Jobs with Tariffs and Quotas Is Also Expensive $51,233,000 27,987,000 6,329,000 3,813,000 1,933,000 1,778,000 915,000 Rice Natural gas Gasoline Paper Beef, pork, and poultry Cosmetics Radio and television sets COST TO CONSUMERS PER YEAR FOR EACH JOB SAVED PRODUCT

26. Government Policies That Restrict International Trade Learning Objective 6.4 Gains from Unilateral Elimination of Tariffs and Quotas Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange. Other Barriers to Trade In addition to tariffs and quotas, governments sometimes erect other barriers to trade.

27. The Argument over Trade Policies and Globalization Learning Objective 6.5 World Trade Organization (WTO) A n international organization that oversees international trade agreements. Why Do Some People Oppose the World Trade Organization? Globalization The process of countries becoming more open to foreign trade and investment. Anti-Globalization Some people believe that free trade and foreign investment destroy the distinctive cultures of many countries. Many governments have resisted globalization proposals.

28. The Unintended Consequences of Banning Goods Made with Child Labor Learning Objective 6.5 Would eliminating child labor in developing countries be a good thing? Making the Connection

29. The Argument over Trade Policies and Globalization Learning Objective 6.5 Why Do Some People Oppose the World Trade Organization? Protectionism The use of trade barriers to shield domestic firms from foreign competition. “ Old-Fashioned” Protectionism Saving jobs. Protecting high wages. Protecting infant industries. Protecting national security. Protectionism is usually justified on the basis of one of the following arguments:

30. Has NAFTA Helped or Hurt the U.S. Economy? Learning Objective 6.5 Despite resistance to NAFTA, time proved that the U.S. economy gained jobs. Making the Connection

31. The Argument over Trade Policies and Globalization Learning Objective 6.5 Dumping Dumping Selling a product for a price below its cost of production. Positive versus Normative Analysis (Once Again) Positive analysis concerns what is. Normative analysis concerns what ought to be.

32. The Argument over Trade Policies and Globalization Learning Objective 6.5 Positive versus Normative Analysis (Once Again) The success of industries in getting the government to erect barriers to foreign competition depends partly on some members of the public knowing full well the costs of trade barriers but supporting them anyway. However, two other factors are also at work: The costs tariffs and quotas impose on consumers are large in total but relatively small per person. The jobs lost to foreign competition are easy to identify, but the jobs created by foreign trade are less easy to identify.

33. An Inside LOOK The United States and South Korea Reach a Trade Deal U.S. and South Korea Agree to Sweeping Trade Deal

34. Absolute advantage Autarky Comparative advantage Dumping Exports External economies Free trade Globalization Imports Opportunity cost Protectionism Quota Tariff Terms of trade Voluntary export restraint (VER) World Trade Organization (WTO) K e y T e r m s

35. Multinational Firms Multinational enterprise A firm that conducts operations in more than one country. Table 6-5 Top 25 Multinational Corporations, 2007 Appendix

36. Multinational Firms Table 6-5 Top 25 Multinational Corporations, 2007 (continued) Appendix

37. Multinational Firms A Brief History of Multinational Enterprises Foreign direct investment The purchase or building by a domestic firm of a facility in a foreign country. Foreign portfolio investment The purchase by an individual or a firm of stocks or bonds issued in another country. Appendix

38. Multinational Firms Strategic Factors in Moving from Domestic to Foreign Markets Firms might expect to increase their profits through overseas operations for five main reasons: To avoid tariffs or the threat of tariffs. To gain access to raw materials. To gain access to low-cost labor. To minimize exchange-rate risk. To respond to industry competition. Appendix

39. Have Multinational Corporations Reduced Employment and Lowered Wages in the United States? Many U.S. jobs require technical training. Appendix Making the Connection

40. Multinational Firms Challenges to U.S. Firms in Foreign Markets Expanding into foreign markets can often be quite difficult and the additional costs incurred may end up being greater than the additional revenue gained. Competitive Advantages of U.S. Firms Some U.S. firms have successful foreign operations because of the strength of their brand names. A U.S. firm’s global competitive advantage changes over time. Appendix