6. Trade Balances
The trade balance is the difference
between the value of exports and
imports.
Any imbalance in America’s trade
must be offset by reverse imbalances
elsewhere.
Trade balance = exports – imports
6
7. Trade Balances
Trade deficit is the amount by which
the value of imports exceeds the
value of exports in a given time
period.
Trade surplus is the amount by
which the value of exports exceeds
the value of imports in a given time
period.
7
9. Bilateral Trade Balances:
Top Deficit Countries
Country
China
Japan
Canada
Mexico
Germany
Trade Balance
(in billions of dollars)
–233
–88
–73
–64
–48
9
10. Bilateral Trade Balances:
Top Surplus Countries
Country
Netherlands
U.A.E.
Australia
Hong Kong
Belgium
Trade Balance
(in billions of dollars)
+14
+11
+10
+10
+7
10
11. Motivation to Trade
Why trade when . . .
. . . we import many of the things we also
export.
. . . we could produce many of the other
things we import.
. . . we seem to seem to worry so much
about trade imbalances.
LO2
11
12. Specialization
Trade allows nations to specialize
and specialization increases total
output.
Trade increases world output and the
standards of living in all trading
countries.
LO2
12
13. Production and Consumption
Without Trade
The gains from trade can be
illustrated using production
possibilities curves.
Production possibilities – The
alternative combinations of final goods
and services that could be produced in
a given time period with all available
resources and technology.
LO2
13
14. Production and Consumption
Without Trade
In the absence of trade, a country’s
consumption possibilities are
identical to its production
possibilities. possibilities - The
Consumption
alternative combinations of goods and
services that a country could consume
in a given time period.
LO2
14
15. Consumption Possibilities Without
Trade
U.S. Production
Possibilities
Bread
Wine
100
0
80
10
60
20
40
30
20
40
0
50
LO2
French Production
Possibilities
Bread
Wine
15
0
12
12
9
24
6
36
3
48
0
60
15
16. Consumption Possibilities Without
Trade
U.S. production possibilities
OUTPUT OF BREAD
(zillions of loaves per year)
100 A
B
80
C
60
D
40
E
20
0
10
20
30
40
F
50
60
OUTPUT OF WINE (zillions of barrels per year)
LO2
16
17. Consumption Possibilities Without
Trade
French production possibilities
OUTPUT OF BREAD
(zillions of loaves per year)
25
20
15 G
H
10
I
J
5
0
K
10
20
30
40
50
L
60
OUTPUT OF WINE (zillions of barrels per year)
LO2
17
18. Production and Consumption With
Trade
To assess the potential gain from
trade, we need to consider the
combined output of trading nations.
By increasing the mix of output in
each trading country, we can
increase total world output.
LO2
18
19. Mutual Gains
Each country produces those goods
it makes best, then trades with other
countries to acquire the goods it
desires to consume.
When a country engages in
international trade, its consumption
possibilities always exceed its
production possibilities.
LO2
19
22. QUANTITY OF BREAD
(zillions of loaves per year)
Consumption Possibilities With
Trade
120
100
80
60
40
20
0
(a) U.S. production and
consumption
A
Production with
trade
C
Consumption with
trade
N
D
Production and
consumption without trade
10
20
30
40
50
60
QUANTITY OF WINE (zillions of barrels per
year)
LO2
22
23. Consumption Possibilities With
Trade
(b) French production and consumption
QUANTITY OF BREAD
(zillions of loaves per year)
20
LO2
15
I
10
M
Consumption with trade
Production
with trade
K
Production and
5 consumption without trade
0
10
20
30
40
50
QUANTITY OF WINE (zillions of barrels per
year)
60
23
24. Gains from Specialization
United States
France
World total
LO2
Old Mix of
Output
Bread Wine
40
30
(point D)
9
24
(point I)
49
54
New Mix of
Output
Bread Wine
60
20
(point C)
3
48
(point K)
63
68
24
25. Pursuit of Comparative Advantage
Although international trade can
make everyone better off, it’s not
obvious which goods should be
traded, or on what terms.
LO1
25
26. Opportunity Costs
The decision to export is based on
comparative advantage.
Comparative advantage - The ability
of a country to produce a specific good
at a lower opportunity cost than its
trading partners.
Opportunity cost - The most desired
goods or services that are forgone in
order to obtain something else.
LO1
26
27. Comparative Advantage
Comparative advantage refers to the
relative (opportunity costs) of
producing particular goods.
World output, and thus potential
gains from trade, will be maximized
when each country pursues its
comparative advantage.
LO1
27
28. Absolute Costs Don’t Count
The absolute advantages in
production do not matter.
Absolute advantage – The ability of a
country to produce a specific good with
fewer resources (per unit of output) than
other countries.
LO1
28
29. Terms of Trade
The terms of trade establish the
trading rate.
Terms of trade is the rate at which
goods are exchanged – the amount
of good A given up for good B in
trade.
29
30. Limits to the Terms of Trade
A country will not trade unless the
terms of trade are superior to
domestic opportunities.
The terms of trade between two
countries will lie somewhere between
their respective opportunity costs in
production.
30
31. Searching for the Terms of Trade
Bread
United
States
Bread
France
A
100
80 X
60
C
D
40
Production
20
possibilities
0
120
90
60
30
10
0
10
20
30
Y
Consumption
possibilities
N
40
50
60
70
80
90 100 110
Consumption possibilities
L
M
20
30
Production possibilities
K
40 50 60
Wine
70
80
90 100 110
31
32. The Role of Markets and Prices
The decision to import or export a
particular good is often left up to the
market decisions of individual
consumers and producers.
32
33. The Role of Markets and Prices
The terms of trade, like the price of
any good, will depend on the
willingness of market participants to
buy or sell at various prices.
33
34. Protectionist Pressures
Although the potential gains from
trade are impressive, not everyone
favors free trade.
Imports typically compete with a
domestic industry.
LO3
34
36. Import-Competing Industries
Workers and producers who compete
with imported products – who work in
import-competing industries – have
an economic interest in restricting
trade.
LO3
36
37. Export Industries
Trade not only alters the mix of
output but also redistributes income
from import-competing industries to
export industries.
LO3
37
38. Net Gain
Trade restrictions designed to protect
specific microeconomic interests
reduce the total gains from trade.
LO3
38
39. Additional Pressures
Selfish micro interests are not the
only source of trade restrictions.
Other arguments are used to restrict
trade.
LO3
39
40. National Security Concerns
Essential defense-related goods are
vital during times of war.
A war could disrupt this flow leaving
us vulnerable.
Exporting vital technology to a
potential enemy is not wise.
LO3
40
41. Dumping
Import competing industries are
placed at risk when goods are
consistently dumped in a nation.
Dumping is the sale of goods in
export markets at prices below
domestic prices.
LO3
41
42. Infant Industries
Even normal export prices might
make it difficult or impossible for a
new domestic industry to develop.
These industries may need
temporary protection from imports.
LO3
42
43. Infant Industries
Trade restrictions are justified only if
there is tangible evidence that the
industry can develop a comparative
advantage reasonably quickly.
LO3
43
44. Improving the Terms of Trade
The distribution of the gains from
trade depends on the terms of trade.
Putting restrictions on imports can
move the terms of trade in our favor
We would end up with a larger share
of the gains from trade.
LO3
44
45. Barriers to Trade
The microeconomic losses
associated with trade give rise to a
constant clamor for trade restrictions.
LO3
45
46. Embargoes
The sure-fire way to restrict trade is
simply to eliminate it.
An embargo is a prohibition against
trading particular goods.
LO3
46
47. Tariffs
A more frequent trade restriction is a
tariff.
A tariff is a tax (duty) imposed on
imported goods.
A tariff makes imported goods more
expensive to domestic consumers,
and less competitive with
domestically priced goods.
LO3
47
48. “Beggar-Thy-Neighbor”
The curtailment of imports looks like
an easy solution to the problem of
domestic unemployment.
Tariffs inflict harm on foreign
producers.
When foreign countries retaliate with
tariffs of their own, world trade
shrinks and unemployment increases
in all countries.
LO3
48
49. Quotas
The same outcome of a tariff can be
attained more directly by imposing an
import quota.
A quota is a limit on the quantity of a
good that may be imported in a given
time period.
LO3
49
51. No-Trade Equilibrium
The equilibrium price is completely
determined by domestic demand and
supply curves.
Equilibrium price – The price at which
the quantity of a good demanded in a
given time period equals the quantity
supplied.
LO3
51
52. Free-Trade Equilibrium
Free trade allows the import of
unlimited quantity of foreign supplies
at the world price.
Free trade results in reduced prices
and increased consumption.
LO3
52
53. Tariff-Restricted Trade
Tariffs raise the price of imports and
shifts the import supply curve
upward.
Domestic prices rise, domestic
production rises, and domestic
consumption falls.
LO3
53
54. Quota-Restricted Trade
Quotas are a greater threat to
competition than tariffs because
quotas preclude additional imports at
any price.
LO3
54
55. Impact of Trade Restrictions
PRICE (dollars per unit)
(a) No-trade equilibrium
D1
p1
0
LO3
S1
q1
QUANTITY (units per year)
55
56. Impact of Trade Restrictions
PRICE (dollars per unit)
(b) Free-trade equilibrium
D1
p1
B
p2
0
LO3
S1
qd
S2
q1
q2
QUANTITY (units per year)
56
57. Impact of Trade Restrictions
PRICE (dollars per unit)
(c) Tariff-restricted trade
D1
p1
p3
p2
0
LO3
S1
C
S3
S2
qd qt
q1
q3 q2
QUANTITY (units per year)
57
58. Impact of Trade Restrictions
PRICE (dollars per unit)
(d) Quota-restricted trade
D1
S4
Q
p1
p4
p2
0
LO3
S1
q1
q4 q2
QUANTITY (units per year)
58
59. Voluntary Restraint Agreements
A slight variant of quotas has been
used in recent years.
A voluntary restraint agreement
(VRA) is an agreement to reduce the
volume of trade in a specific good – a
“voluntary” quota.
LO3
59
60. Nontariff Barriers
Embargoes, export controls, tariffs,
and quotas are the most visible
barriers to trade, but they are only
the tip of the iceberg.
LO3
60
61. Nontariff Barriers
The U.S. uses product standards,
licensing restrictions, restrictive
procurement practices, and other
nontariff barriers to restrict roughly 15
percent of imports.
LO3
61
62. An Increasingly Global Market
Trade policy is a continuing conflict
between the proponents of free trade
and the special interests that profit
from trade protection.
62
63. Multilateral Trade Pacts
The long-term trend is towards
lowering trade barriers, thereby
increasing global competition.
Protectionist forces are being countered
by the worldwide recognition of the
gains from trade.
Exporters and firms that use imported
inputs push for free trade.
63
64. Global Pacts: GATT and WTO
The granddaddy of the multilateral,
multiyear free-trade pacts was the
General Agreement on Tariffs and
Trade (GATT).
64
65. WTO
The 1994 GATT pact created the
World Trade Organization (WTO) to
enforce free-trade rules.
The WTO has become the world’s
trade police force.
65
66. WTO Protests
Some people see free trade as a
mixed blessing.
Environmentalists worry about depletion
of resources, congestion and pollution.
Labor organizations worry about
depressed wages and working
conditions.
Third World countries worry about an
unfair trade playing field.
66
67. Regional Pacts
Groups of nations have moved even
faster toward open markets by
developing regional trade pacts.
67
68. NAFTA
In December 1992, the United
States, Canada, and Mexico signed
the North American Free Trade
Agreement (NAFTA).
The ultimate goal of NAFTA is to
eliminate all trade barriers between
these three countries.
68
69. CAFTA
The success of NAFTA prompted a
similar 2005 agreement between the
U.S. and central American nations.
The Central American Free Trade
Agreement (CAFTA) aims to
eliminate tariffs and standardize
trade and investment policies in
CAFTA nations.
69
70. European Union
The European Union (EU) is a
regional pact that virtually eliminates
national boundaries between 25
countries.
The EU eliminated trade barriers and
permits full inter-country mobility of
workers and capital.
In effect, Europe has become one
large unified market.
70
