International Trade part 2 SFLS

International Trade:
3.) Graphing International Trade
1.) Specialization & Comparative Advantage
2.) PPC and Trading Possibilities
4.) Terms of Trade
5.) Arguments about International Trade
6.) Some ways to restrict International Trade

International Trade Graph
A country has a comparative advantage in a
good if it produces the good at lower
opportunity cost than other countries.
Countries can gain from trade if each exports
the goods in which it has a comparative
advantage.
Now we apply the tools of welfare economics
to see where these gains come from and
who gets them.

The World Price and Comparative Advantage
PW = the world price of a good, in world markets
PD = domestic国内 price without trade (autarky 自给自足 )
If PD < PW,
- country has (CA) in the good
- under free trade, country exports the good
If PD > PW,
- country does not have (CA)
- under free trade, country imports the good
Things to define on the graph first:

1. The Small Economy Assumption
Assumptions 假定:

1. The Small Economy Assumption
Assumptions 假定:
- A small economy is a price taker in world
markets: Its actions have no effect on PW.
Not always true – especially for the U.S. And China – but makes
understanding easier without changing its lessons.
- When a small economy engages in free
trade, PW is the only relevant相应 price:
No seller would accept less than PW, since they could sell the good
for PW in world markets.
No buyer would pay more than PW, since they could buy the good
for PW in world markets.

Without Trade,
PD = $4
Q = 500
PW = $6
With Free Trade,
- domestic 国内 consumers
demand 300
-domestic producers
supply 750
Exports = 450
P
Q
D
S
$6
$4
500300
Soybeans
exports
750
Exporting Soybeans example…

Without Trade,
CS = A + B
PS = C
Total surplus
= A + B + C
With Free Trade,
CS = A
PS = B + C + D
Total surplus
= A + B + C + D
P
Q
D
S
$6
$4
Soybeans
exports
A
B D
C
gains
from trade
Exporting Soybeans example…

Without Trade,
PD = 3000
Q = 400
In World Markets,
PW = 1500
P
Q
D
S
$1500
200
$3000
400 600
Cars
Importing Cars example…

With Free Trade,
- domestic consumers
demand 600
- domestic producers
supply 200
Imports = 400
P
Q
D
S
1500
200
3000
600
Cars
imports
A Country That Imports TVs
Without Trade,
PD = 3000, Q = 400
In world markets,
PW = 1500

Without Trade,
CS = A
PS = B + C
Total surplus
= A + B + C
With Free Trade,
CS = A + B + D
PS = C
Total surplus
= A + B + C + D
P
Q
D
S
1500
3000
Cars
A
B D
C
gains
from trade
imports
A Country That Imports TVs

total surplus
producer surplus
consumer surplus
direction of trade
rises
falls
rises
imports
PD > PW
rises
rises
falls
exports
PD < PW
Summary: The Welfare Effects of Trade
Whether a good is imported or exported,
trade creates winners and losers.
But the gains exceed the losses.

International Trade:
2.) PPC and Trading Possibilities
4.) Terms of Trade
3.5) Trade Graph Results

Importing Country Results:
Consumers
are Winners!
3.5) Trade Graph Results…
Lower prices and
more variety!

Importing Country Results:
Producers are
Losers!
More competition,
lower prices, less
customers.

Exporting Country Results:
Producers are
Winners!
Higher prices
outside country,
more customers!

Exporting Country Results:
Consumers
are Losers!
Higher prices
outside country, so
prices for you are
higher.

Winners: Losers:
Consumers
in importing
country
Producers in
importing
country
Consumers
in exporting
country
Producers
in exporting
country

- An easy way to measure trade
between countries.
(if your getting a good deal or not)
好对付?
4.) Terms of Trade
Terms of Trade - A ratio of the indexed prices of
exports and imports in a country.

4.) Terms of Trade
-List of all the prices put together.Index 指數
Index price of exports
Index price of imports
X 100
Base year 基年 is 100
Equation:

4.) Terms of Trade
For example, if a country exports 50 dollars worth of
product in exchange for 100 dollars worth of imported
product, that country's terms of trade are 50/100 = 0.5.
If it’s over 100 – you get better price for your
exports then what you pay for imports.
If it’s under 100 – you get worse price for your
exports then you pay for imports.

4.) Terms of Trade
- It can be used as a comparison of
prices over time.
Terms of Trade Usefulness
Terms of Trade Limitations
- Does not tell us about the volume 量 of the
countries' exports, only relative 相对的 changes
between countries over time.

Reasons for: Reasons against:
1.) Comparative
Advantages
2.) Variety
3.) Technology
4.) Government
Policy
1.) Jobs
2.) National Security
3.) Infant-Industries
4.) Unfair competition
6.) Correct Balance of Payments
Disequilibrium
7.) Control the consumption
of Demerit Goods
5.) The protection-as-
bargaining-chip argument

1.) Comparative
Advantages
2.) Variety
3.) Technology
4.) Government
Policy
1.) Jobs
Disequilibrium
of Demerit Goods
Most economists
agree that these are
all bad reason.
However people use
them all the time.

Reasons for
1. ) Comparative Advantages - Produce more with
lower costs and produce
on a larger scale.

Reasons for
Comparative advantages
2.) Variety - More cool stuff to buy!

Reasons for
Variety
3.) Technology -Learn new things and can
make even more cool stuff!

Reasons for
Variety
Technology
4.) Government Policy -To diversify in case of
shocks’
多样化
如果
供给冲击

Reasons for
Comparative Advantages
Variety
Technology
Increase total
welfare for your
country and
people
Government Policy

Why All the Opposition 反对 to Trade?
 The winners from trade could compensate 补偿 the losers and still be
better off. Yet, such compensation rarely occurs.
 The losses are often highly concentrated 浓 among
a small group of people, who feel them more strongly.
The gains are often spread thinly over many people, who may not see
how trade benefits them.
 Hence, the losers have more incentive to organize and lobby for
restrictions on trade. 因此，失败者有更多的动力去组织和游说，对贸易的
限制。
Easy to see losers易见的输家
Hard to see winners 很难见到赢家

Reasons Against
- Trade destroys jobs in the
industries that compete
against imports.
1.) Jobs

Reasons Against
- Trade destroys jobs in the
industries that compete
against imports.
1.) Jobs
Economists’ response:
Total unemployment does not rise as imports rise, because job
losses from imports are offset 抵销 by job gains in export
industries.
Even if all goods could be produced more cheaply abroad, the
country need only have a comparative advantage to have a
viable export industry and to gain from trade.

U.S. Imports & Unemployment,
Decade averages, 1956-2005
0%
2%
4%
6%
8%
10%
12%
14%
16%
1956
-65
1966
-75
1976
-85
1986
-95
1996
-2005
Imports
(% of GDP)
Unemployment
(% of labor force)
During this time
international trade
has exploded, but it
doesn’t mean
everyone lost their
job.
In fact there are more
jobs then ever!

Reasons Against
Jobs
2.) National Security - An industry vital 重要to national
security should be protected from
foreign competition to prevent
dependence on foreigners.
Ex –
China will not let America build their
aircraft carriers even though America
has the (CA) in making them.

Reasons Against
Jobs
2.) National Security - An industry vital 重要to national
security should be protected from
foreign competition to prevent
dependence on foreigners.
Fine, as long as we base policy on true security
needs.
But producers may exaggerate their own
importance to national security to obtain
protection from foreign competition.

Reasons Against
Jobs
National Security
Sunrise- industries
- A new industry argues for
temporary protection until it
is mature 成熟 and can
compete with foreign firms.

China prevents many
Hollywood movies
from being seen in
China.

Because the
government wants to
help build the Chinese
movie industry.

Reasons Against
Jobs
National Security
Sunrise- industries
- A new industry argues for
temporary protection until it is
mature 成熟 and can compete
with foreign firms.
Difficult for govt to determine which industries will eventually be
able to win.
to compete and whether benefits of establishing these industries
exceed cost to consumers of restricting imports.
Besides, if a firm will be profitable in the long run,
it should be willing to incur temporary losses.

Reasons Against
Jobs
National Security
Infant-Industries
4.) Unfair Competition
Dumping
- Producers argue their
competitors in another
country have an unfair
advantage,
example - due to govt
subsidies. Dumping

Right now many countries are
blaming China for sells steel
below the cost is takes to
produce it, because the
Chinese government wants to
support the Chinese steel
industry, and other countries
suffer because China is not
playing by the WTO rules.

Reasons Against
Jobs
National Security
Infant-Industries
4.) Unfair Competition
Dumping
- Producers argue their
competitors in another
country have an unfair
advantage,
Great! Then we can import extra-cheap
products subsidized by the other country’s
taxpayers.
The gains to our consumers will exceed
the losses to our producers.

Reasons Against
Example: The U.S. can
threaten to limit imports of
French wine unless France lifts
their quotas 配额
on American beef.Economists’ response:
Suppose France refuses. Then the U.S. must choose
between two bad options:
A) Restrict imports from France, which reduces welfare
in the U.S.
B) Don’t restrict imports, which reduces U.S. credibility.

1.) Comparative
Advantages
2.) Variety
3.) Technology
4.) Government
Policy
1.) Jobs
Disequilibrium
of Demerit Goods
Ways to control importation:
Tariffs and Quotas

- a tax on imports
Example: Cotton shirts
PW = $20
Tariff: T = $10/shirt
Consumers must pay $30 for an
imported shirt.
So, domestic producers can charge $30
per shirt.
In general, the price facing domestic
buyers & sellers equals (PW + T ).
Tariff

$30
PW = $20
Free trade:
buyers demand 80
sellers supply 25
imports = 55
T = $10/shirt
price rises to $30
buyers demand 70
sellers supply 40
imports = 30
P
Q
D
S
$20
25
Cotton shirts
40 70 80
importsimports

$30
Free trade
CS = A + B + C + D + E + F
PS = G
Total surplus = A + B
+ C + D + E + F + G
Tariff
CS = A + B
PS = C + G
G Revenue = E
DWL = D + F
Total surplus = A + B
+ C + E + G
P
Q
D
S
$20
25
Cotton shirts
40
A
B
D E
G
FC
70 80
deadweight
loss = D + F

$30
DWL
D = deadweight loss
from the
overproduction
of shirts
F = deadweight loss
from the under-
consumption
of shirts
P
Q
D
S
$20
25
Cotton shirts
40
A
B
D E
G
FC
70 80
deadweight
loss = D + F

- a tax on imports
Tariff
Quota - is a limit on imports of a good.
Mostly has the same effects as a tariff:
Raises price, reduces quantity of imports.
- A tariff creates revenue for the govt. A
quota creates profits for the foreign
producers of the imported goods, who
can sell them at higher price.

Absolute
Advantage
Comparative
Advantage
(CA)
- the ability to produce at a lower
opportunity cost then someone
else.
- You produce what you have
(CA) in and trade for the other
things that you don’t.

4,000
100
5,000
2,000
1,000
3,000
500200 300 400
0
Computers
Wheat
(tons)
U.S. Consumption With Trade
2700270
= amount
consumed
0110+ imported
7000– exported
3400160produced
wheatcomputers
With trade, can consume
outside the PPC

2.5) Real World Limitations
1.) PPF are not linear直线
Production costs are not constant 不恒定
2.) Prices, Inflation 通胀, Exchange rates 汇率
change the equation
3.) Other costs are not included
ex - Transportation costs
Even though this is far from realistic 实际 it still is the
starting point that explains that trade is good!
4.) Trade Barriers贸易壁垒

International Trade part 2 SFLS

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International Trade part 2 SFLS