Transcript Chapter 8

Chapter 8: Comparative Advantage and the Gains from International Trade
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Chapter 8: Comparative Advantage and the Gains from International Trade
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Chapter 8: Comparative Advantage and the Gains from International Trade
CHAPTER
8
Comparative
Advantage and
the Gains from
International Trade
In early 2009, with
unemployment rising and
incomes falling during the
recession, Congress and
the Obama administration
passed a stimulus bill to
increase government
spending.
Prepared by:
Fernando Quijano
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Chapter 8: Comparative Advantage and the Gains from International Trade
CHAPTER
8
Comparative
Advantage and
the Gains from
International Trade
Chapter Outline and
Learning Objectives
8.1 The United States in the International
Economy
Discuss the role of international trade in
the U.S. economy.
8.2 Comparative Advantage in International
Trade
Understand the difference between
comparative advantage and absolute
advantage in international trade.
8.3 How Countries Gain from International
Trade
Explain how countries gain from
international trade.
8.4 Government Policies That Restrict
International Trade
Analyze the economic effects of
government policies that restrict
international trade.
8.5 The Arguments over Trade Policies and
Globalization
Evaluate the arguments over trade
policies and globalization.
Appendix: Multinational Firms
Understand why firms operate in more
than one country.
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Chapter 8: Comparative Advantage and the Gains from International Trade
The United States
in the International Economy
8.1 LEARNING OBJECTIVE
Discuss the role of international
trade in the U.S. economy.
Tariff A tax imposed by a
government on imports.
Imports Goods and services
bought domestically but produced in
other countries.
Exports Goods and services
produced domestically but sold in
other countries.
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The United States
in the International Economy
8.1 LEARNING OBJECTIVE
Discuss the role of international
trade in the U.S. economy.
Chapter 8: Comparative Advantage and the Gains from International Trade
The Importance of Trade to the U.S. Economy
FIGURE 8-1
International Trade Is of
Increasing Importance to the
United States
Exports and imports of goods and
services as a percentage of total
production—measured by GDP— show
the importance of international trade to
an economy. Since 1950, both imports
and exports have been steadily rising as
a fraction of U.S.GDP.
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The United States
in the International Economy
8.1 LEARNING OBJECTIVE
Discuss the role of international
trade in the U.S. economy.
Chapter 8: Comparative Advantage and the Gains from International Trade
U.S. International Trade in a World Context
FIGURE 8-2
The Eight Leading Exporting
Countries
The United States is the leading
exporting country, accounting for about
9.5 percent of total world exports. The
values are the shares of total world
exports of merchandise and
commercial services.
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The United States
in the International Economy
8.1 LEARNING OBJECTIVE
Discuss the role of international
trade in the U.S. economy.
Chapter 8: Comparative Advantage and the Gains from International Trade
U.S. International Trade in a World Context
FIGURE 8-3
International Trade as a Percentage of GDP
International trade is still less important to the United States than to most other countries.
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8.1 LEARNING OBJECTIVE
Making How Caterpillar Depends on
the
Chapter 8: Comparative Advantage and the Gains from International Trade
Connection
Discuss the role of international
trade in the U.S. economy.
International Trade
Caterpillar has become
increasingly dependent
over time on foreign
markets. The firm’s exports
rose from just over half of
total sales in 2004 to more
than two-thirds
in 2008.
YOUR TURN: Test your understanding by doing related problem 1.5 at the end of
this chapter.
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Comparative Advantage
in International Trade
8.2 LEARNING OBJECTIVE
Understand the difference between
comparative advantage and absolute
advantage in international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
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 highestvalued alternative that must be
given up to engage in an activity.
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8.2 LEARNING OBJECTIVE
Comparative Advantage
in International Trade
Understand the difference between
comparative advantage and absolute
advantage in international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
Comparative Advantage in International Trade
TABLE 8-1
An Example of Japanese Workers Being
More Productive Than American Workers
OUTPUT PER HOUR OF WORK
CELL PHONES
DIGITAL MUSIC
PLAYERS
JAPAN
12
6
UNITED STATES
2
4
Absolute advantage The ability to
produce more of a good or service
than competitors when using the
same amount of resources.
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8.2 LEARNING OBJECTIVE
Comparative Advantage
in International Trade
Understand the difference between
comparative advantage and absolute
advantage in international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
Comparative Advantage in International Trade
TABLE 8-2
The Opportunity Costs of Producing Cell Phones and Digital Music Players
The table shows the opportunity cost each country faces in producing cell phones and digital music players. For
example, the entry in the first row and second column shows that Japan must give up 2 cell phones for every digital
music player it produces.
OPPORTUNITY COSTS
CELL PHONES
DIGITAL MUSIC PLAYERS
JAPAN
0.5 digital music player
2 cell phones
UNITED STATES
2 digital music players
0.5 cell phone
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8.3 LEARNING OBJECTIVE
Chapter 8: Comparative Advantage and the Gains from International Trade
How Countries Gain
from International Trade
Explain how countries gain
from international trade.
Autarky A situation in which a
country does not trade with other
countries.
TABLE 8-3
Production without Trade
PRODUCTION AND CONSUMPTION
CELL PHONES
DIGITAL MUSIC PLAYERS
JAPAN
9,000
1,500
UNITED STATES
1,500
1,000
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How Countries Gain
from International Trade
8.3 LEARNING OBJECTIVE
Explain how countries gain
from international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
Increasing Consumption through Trade
Terms of trade The ratio at which a
country can trade its exports for
imports from other countries.
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How Countries Gain
from International Trade
8.3 LEARNING OBJECTIVE
Explain how countries gain
from international trade.
Increasing Consumption through Trade
Chapter 8: Comparative Advantage and the Gains from International Trade
TABLE 8-4
Gains from Trade for Japan and the United States
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8.3 LEARNING OBJECTIVE
Solved Problem
8-3
Explain how countries gain
from international trade.
The Gains from Trade
WITHOUT TRADE
Chapter 8: Comparative Advantage and the Gains from International Trade
PRODUCTION AND CONSUMPTION
Portugal
England
CLOTH
WINE
18,000
63,000
123,000
18,000
WITH TRADE
PRODUCTION
WITH TRADE
CLOTH
WINE
PORTUGAL
ENGLAND
TRADE
CLOTH
WINE
CONSUMPTION
WITH TRADE
CLOTH
WINE
0
150,000
Import
18,000
Export
18,000
18,000
132,000
90,000
0
Export
18,000
Import
18,000
72,000
18,000
GAINS FROM TRADE
INCREASED CONSUMPTION
Portugal
England
9,000 wine
9,000 cloth
YOUR TURN: For more practice, do related problems 3.4 and 3.5 at the end of this chapter.
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How Countries Gain
from International Trade
8.3 LEARNING OBJECTIVE
Explain how countries gain
from international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
Why Don’t We See Complete Specialization?
We do not see complete specialization in the real world for three
main reasons:
• Not all goods and services are traded internationally.
• Production of most goods involves increasing opportunity costs.
• Tastes for products differ.
Don’t Let This Happen to YOU!
Remember That Trade Creates Both Winners and Losers
YOUR TURN: Test your understanding by doing related problem 3.12 at the end
of this chapter.
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How Countries Gain
from International Trade
8.3 LEARNING OBJECTIVE
Explain how countries gain
from international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
Does Anyone Lose as a Result of International Trade?
In our cell phone and digital music player example, consumption increases
in both the United States and Japan as a result of trade. Everyone gains,
and no one loses. Or do they?
In our example, we referred repeatedly to “Japan” or the “United States”
producing cell phones or digital music players. But countries do not produce
goods—firms do. In a world without trade, there would be cell phone and
digital music player firms in both Japan and the United States. In a world
with trade, there would only be Japanese cell phone firms and U.S. digital
music player firms. Japanese digital music player firms and U.S. cell phone
firms would close.
Overall, total employment will not change and production will increase as a
result of trade. Nevertheless, the owners of Japanese digital music player
firms, the owners of U.S. cell phone firms, and the people who work for
them are worse off as a result of trade.
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How Countries Gain
from International Trade
8.3 LEARNING OBJECTIVE
Explain how countries gain
from international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
Where Does Comparative Advantage Come From?
Among the main sources of comparative advantage are the following:
• Climate and natural resources.
This source of comparative advantage is the most obvious.
• Relative abundance of labor and capital.
Some countries, such as the United States, have many highly
skilled workers and a great deal of machinery.
• Technology.
Broadly defined, technology is the process firms use to turn
inputs into goods and services.
• External economies.
External economies Reductions in a firm’s costs that
result from an increase in the size of an industry.
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8.3 LEARNING OBJECTIVE
Explain how countries gain
from international trade.
Making Why Is Dalton, Georgia, the
the
Chapter 8: Comparative Advantage and the Gains from International Trade
Connection
Carpet-Making Capital of the
World?
Carpet production is highly
automated and relies primarily on
synthetic fibers. Dalton, a small
city located in rural northwest
Georgia, would not seem to have
any advantages in carpet
production. In fact, the location of
the carpet industry in Dalton was
a historical accident.
Because Catherine Evans Whitener started making
bedspreads by hand in Dalton, Georgia, 100 years ago, a
multibillion-dollar carpet industry is now located there.
YOUR TURN: Test your understanding by doing related problem 3.13 at the end
of this chapter.
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How Countries Gain
from International Trade
8.3 LEARNING OBJECTIVE
Explain how countries gain
from international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
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.
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Chapter 8: Comparative Advantage and the Gains from International Trade
Government Policies That
Restrict International Trade
8.4 LEARNING OBJECTIVE
Analyze the economic effects of
government policies that restrict
international trade.
Free trade Trade between countries that is
without government restrictions.
FIGURE 8-4
The U.S. Market for Ethanol
under Autarky
This figure shows the market for
ethanol in the United States, assuming
autarky, where the United States does
not trade with other countries.
The equilibrium price of ethanol is
$2.00 per gallon, and the equilibrium
quantity is 6.0 billion gallons per year.
The blue area represents consumer
surplus, and the red area represents
producer surplus.
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Government Policies That
Restrict International Trade
8.4 LEARNING OBJECTIVE
Analyze the economic effects of
government policies that restrict
international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
FIGURE 8-5
The Effect of Imports on the
U.S. Ethanol Market
When imports are allowed into the
United States, the price of ethanol falls
from $2.00 to $1.00.
U.S. consumers increase their
purchases from 6.0 billion gallons to 9.0
billion gallons. Equilibrium moves from
point F to point G. U.S. producers
reduce the quantity of ethanol they
supply from 6.0 billion gallons to 3.0
billion gallons. Imports equal 6.0 billion
gallons, which is the difference between
U.S. consumption and U.S. production.
Consumer surplus equals the areas A,
B, C, and D.
Producer surplus equals the area E.
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Government Policies That
Restrict International Trade
8.4 LEARNING OBJECTIVE
Analyze the economic effects of
government policies that restrict
international trade.
Tariffs
Chapter 8: Comparative Advantage and the Gains from International Trade
FIGURE 8-6
The Effects of a Tariff on
Ethanol
Without a tariff on ethanol, U.S.
producers will sell 3.0 billion gallons
of ethanol, U.S. consumers will
purchase 9.0 billion gallons, and
imports will be 6.0 billion gallons.
The U.S. price will equal the world
price of $1.00 per gallon.
The $0.50-per-gallon tariff raises the
price of ethanol in the United States
to $1.50 per gallon, and U.S.
producers increase the quantity they
supply to 4.5 billion gallons. U.S.
consumers reduce their purchases to
7.5 billion gallons.
Equilibrium moves from point G to
point H. The ethanol tariff causes a
loss of consumer surplus equal to
the area A + C + T + D. The area A
is the increase in producer surplus
due to the higher price. The area T is
the government’s tariff revenue. The
areas C and D represent deadweight
loss.
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Government Policies That
Restrict International Trade
8.4 LEARNING OBJECTIVE
Analyze the economic effects of
government policies that restrict
international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
Quotas and Voluntary Export Restraints
Quota A numerical 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
numerical limit on the quantity of a
good that can be imported by one
country from the other country.
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Government Policies That
Restrict International Trade
8.4 LEARNING OBJECTIVE
Analyze the economic effects of
government policies that restrict
international trade.
Quotas and Voluntary Export Restraints
Chapter 8: Comparative Advantage and the Gains from International Trade
FIGURE 8-7
The Economic Effect of the U.S.
Sugar Quota
Without a sugar quota, U.S. sugar
producers would have sold 3.5 billion
pounds of sugar, U.S. consumers would
have purchased 21.7 billion pounds of
sugar, and imports would have been 18.2
billion pounds. The U.S. price would have
equaled the world price of $0.16 per pound.
Because the sugar quota limits imports to
3.6 billion pounds (the bracket in the graph),
the price of sugar in the United States rises
to $0.33 per pound, and U.S. producers
increase the quantity of sugar they supply to
15.2 billion pounds. U.S. consumers reduce
their sugar purchases to 18.8 billion pounds.
Equilibrium moves from point E to point F.
The sugar quota causes a loss of consumer
surplus equal to the area A + B + C + D.
The area A is the gain to U.S. sugar
producers. The area B is the gain to foreign
sugar producers. The areas C and D
represent deadweight loss. The total loss to
U.S. consumers in 2008 was $3.44 billion.
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Government Policies That
Restrict International Trade
8.4 LEARNING OBJECTIVE
Analyze the economic effects of
government policies that restrict
international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
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.
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8.4 LEARNING OBJECTIVE
Solved Problem
8-4
Analyze the economic effects of
government policies that restrict
international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
Measuring the Economic
Effect of a Quota
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
WITHOUT QUOTA
WITH QUOTA
$10
$10
6 million boxes
16 million boxes
10 million boxes
A+B+C+D+E+F
G
No deadweight loss
$10
$12
10 million boxes
14 million boxes
4 million boxes
A+B
G+C
D+F
YOUR TURN: For more practice, do related problem 4.14 at the end of this chapter.
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Government Policies That
Restrict International Trade
8.4 LEARNING OBJECTIVE
Analyze the economic effects of
government policies that restrict
international trade.
The High Cost of Preserving Jobs with Tariffs and Quotas
Chapter 8: Comparative Advantage and the Gains from International Trade
TABLE 8-5
Preserving U.S. Jobs with
Tariffs and Quotas Is Expensive
PRODUCT
NUMBER OF JOBS
SAVED
Benzenoid chemicals
Luggage
Softwood lumber
Dairy products
Frozen orange juice
Ball bearings
Machine tools
Women's handbags
Canned tuna
216
226
605
2,378
609
146
1,556
773
390
COST TO CONSUMERS PER YEAR
FOR EACH JOB SAVED
$1,376,435
1,285,078
1,044,271
685,323
635,103
603,368
479,452
263,535
257,640
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Government Policies That
Restrict International Trade
8.4 LEARNING OBJECTIVE
Analyze the economic effects of
government policies that restrict
international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
The High Cost of Preserving Jobs with Tariffs and Quotas
TABLE 8-6
Preserving Japanese Jobs
with Tariffs and Quotas Is
Also Expensive
PRODUCT
Rice
Natural gas
Gasoline
Paper
Beef, pork, and poultry
Cosmetics
Radio and television sets
COST TO CONSUMERS PER
YEAR FOR EACH JOB SAVED
$51,233,000
27,987,000
6,329,000
3,813,000
1,933,000
1,778,000
915,000
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Government Policies That
Restrict International Trade
8.4 LEARNING OBJECTIVE
Analyze the economic effects of
government policies that restrict
international trade.
Chapter 8: Comparative Advantage and the Gains from International Trade
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
eliminate their tariffs and quotas in
exchange.
Other Barriers to Trade
In addition to tariffs and quotas,
governments sometimes erect other
barriers to trade.
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Chapter 8: Comparative Advantage and the Gains from International Trade
The Arguments Over Trade
Policies and Globalization
8.5 LEARNING OBJECTIVE
Evaluate the arguments over trade
policies and globalization.
World Trade Organization (WTO) An
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.
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8.5 LEARNING OBJECTIVE
Making The Unintended Consequences
the
Chapter 8: Comparative Advantage and the Gains from International Trade
Connection
Evaluate the arguments over trade
policies and globalization.
of Banning Goods Made with
Child Labor
Of the array of possible employment in which
impoverished children might engage, soccer
ball stitching is probably one of the most
benign. . . . [In Pakistan] children generally
work alongside other family members in the
home or in small workshops. . . .Nor are the
children exposed to toxic chemicals,
hazardous tools or brutal working conditions.
Rather, the only serious criticism concerns the
length of the typical child stitcher’s work-day
and the impact on formal education.
Would eliminating child labor, such
as stitching soccer balls, improve the
quality of children’s lives?
YOUR TURN: Test your understanding by doing related problem 5.5 at the end of
this chapter.
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The Arguments Over Trade
Policies and Globalization
8.5 LEARNING OBJECTIVE
Evaluate the arguments over trade
policies and globalization.
Chapter 8: Comparative Advantage and the Gains from International Trade
Why Do Some People Oppose the World Trade Organization?
“Old-Fashioned” Protectionism
Protectionism The use of trade
barriers to shield domestic firms from
foreign competition.
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The Arguments Over Trade
Policies and Globalization
8.5 LEARNING OBJECTIVE
Evaluate the arguments over trade
policies and globalization.
Chapter 8: Comparative Advantage and the Gains from International Trade
Why Do Some People Oppose the World Trade Organization?
“Old-Fashioned” Protectionism
Protectionism is usually justified on the basis of one of the following arguments:
• Saving jobs.
Supporters of protectionism argue that free trade reduces employment by
driving domestic firms out of business.
• Protecting high wages.
Some people worry that firms in high-income countries will have to start
paying much lower wages to compete with firms in developing countries.
• Protecting infant industries.
It is possible that firms in a country may have a comparative advantage in
producing a good, but because the country begins production of the good
later than other countries, its firms initially have higher costs.
• Protecting national security.
As already discussed, a country should not rely on other countries for
goods that are critical to its military defense.
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The Arguments Over Trade
Policies and Globalization
8.5 LEARNING OBJECTIVE
Evaluate the arguments over trade
policies and globalization.
Chapter 8: Comparative Advantage and the Gains from International Trade
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.
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The Arguments Over Trade
Policies and Globalization
8.5 LEARNING OBJECTIVE
Evaluate the arguments over trade
policies and globalization.
Chapter 8: Comparative Advantage and the Gains from International Trade
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:
1. The costs tariffs and quotas impose on consumers
are large in total but relatively small per person.
2. The jobs lost to foreign competition are easy to
identify, but the jobs created by foreign trade are
less easy to identify.
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8.5 LEARNING OBJECTIVE
Making
the
Chapter 8: Comparative Advantage and the Gains from International Trade
Connection
The Obama Administration
Develops a Trade Policy
Evaluate the arguments over trade
policies and globalization.
Obama pledged that as
president, he would “use trade
agreements to spread good labor
and environmental standards
around the world.”
Would a free trade agreement with
Colombia benefit the United States?
YOUR TURN: Test your understanding by doing related problems 5.7 and 5.8 at
the end of this chapter.
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AN INSIDE
LOOK
Chapter 8: Comparative Advantage and the Gains from International Trade
at Policy
>> Caterpillar and Other
Exporters Oppose “Buy
American” Provision
“Buy American” Clause Stirs Up Controversy
The effect of the “Buy American” provision on the
steel market in the United States.
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Chapter 8: Comparative Advantage and the Gains from International Trade
KEY TERMS
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)
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LEARNING OBJECTIVE
Appendix
Chapter 8: Comparative Advantage and the Gains from International Trade
Multinational Firms
Understand why firms
operate in more than one
country.
Multinational enterprise A firm that conducts
operations in more than one country.
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Appendix
Multinational Firms
LEARNING OBJECTIVE
Understand why firms
operate in more than one
country.
TABLE 8A-1
Chapter 8: Comparative Advantage and the Gains from International Trade
Top 25 Multinational
Corporations, 2009
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Appendix
Multinational Firms
LEARNING OBJECTIVE
Understand why firms
operate in more than one
country.
Chapter 8: Comparative Advantage and the Gains from International Trade
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.
In the early twentieth century, most U.S. firms expanded
abroad through foreign direct investment because the stock
and bond markets in other countries were often too poorly
developed to make foreign portfolio investment practical.
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Appendix
Multinational Firms
LEARNING OBJECTIVE
Understand why firms
operate in more than one
country.
Chapter 8: Comparative Advantage and the Gains from International Trade
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.
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LEARNING OBJECTIVE
Making Have Multinational Corporations
the
Chapter 8: Comparative Advantage and the Gains from International Trade
Connection
Reduced Employment and Lowered
Wages in the United States?
Understand why firms
operate in more than one
country.
During the 1990s, some U.S.
corporations responded to the greater
economic openness of many poorer
countries by relocating manufacturing
operations to those countries.
Many U.S. jobs require
technical training and pay
higher wages.
YOUR TURN: Test your understanding by doing related problem 8A.12 at the end
of this appendix.
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Appendix
Multinational Firms
LEARNING OBJECTIVE
Understand why firms
operate in more than one
country.
Chapter 8: Comparative Advantage and the Gains from International Trade
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.
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Chapter 8: Comparative Advantage and the Gains from International Trade
KEY TERMS
Foreign direct investment
Foreign portfolio investment
Multinational enterprise
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