Transcript International Trade

International Trade
Trade Insights
Trade=exchanging one thing for another. Usually goods
or services for $$.
The economics profession nearly unanimously backs
free trade.
So………….
If economists agree that Free Trade is a good
thing….. Why all the fuss politically and
internally about
1) jobs fleeing the country\
2) unfair advantages for subsidies/
3) what is insourcing?
Why Trade?
Check the label of anything… where was it
made?
How does international trade vary from
domestic trade?
1. Two governments involved
2. Two currencies involved – leads to
foreign exchange market.
3 Basic Purposes for International
Trade
Some things we cannot produce at all or in
sufficient quantity
Like: bananas, rubber, coffee, tea, cocoa,
Scotch whiskey, and tequila.
Reason #2 for IT
When we trade with people we get benefit of
specialization.
I no longer make my own candles or clothes…
Someone who is proficient at that makes
them and I purchase.
Certainly it would be more costly for me to
make my own shorts than to have Nike,
specialize in shorts, produce and distribute.
Reason # 3 for IT
Trade gives us more choices.
Without trade our choice of autos would be
limited. Everyone would drive a GM car, Ford
or Chrysler.
How many of you drive a foreign-make car?
What is balance of trade?
Exports = Imports
Trade deficit = imports exceed exports
Trade surplus = exports exceed imports.
Did You Know That...
• Each year, U.S. residents spend more than $5 million on U.S.
flags manufactured outside the United States.
• This figure may fall somewhat in future years, however, if
some state governments have their way.
• Some state governments have made it illegal to sell U.S. flags
manufactured outside of the United States.
• What effects do restrictions on imports have on quantities
and prices of domestic goods?
The Worldwide Importance of
International Trade
• World GDP today is nearly nine times greater
than it was at the end of World War II.
• World trade has increased to more than 28
times what it was in 1950.
The Worldwide Importance of
International Trade (cont'd)
• The United States has figured prominently in
this expansion of world trade.
– Imports added up to barely 4% of annual U.S. GDP
in 1950.
– Today they account for more than17%.
Figure 33-1 The Growth of World Trade, Panel (a)
Source: Steven Husted and Michael Melvin, International Economics, 3rd ed. (New York: HarperCollins, 1995), p. 11,
used with permission; World Trade Organization; Federal Reserve System; U.S. Department of Commerce.
What is the difference?
Open Economy? ____________
Closed Economy? __________
Open Economy = one with an international sector
(more goods for export and fewer for import) U.S.
shifts productive resources to aircraft, and wheat
and fewer to television sets and clothing.)
Closed Economy (or autarky) = all production
resources kept internally. National self-sufficiency or
non-reliance on other countries.
Absolute Advantage
(a country’s ability to produce a good more
efficiently than another country.)
Why We Trade: Comparative Advantage and Mutual Gains From
Exchange (cont'd)
• Comparative Advantage
– The ability to produce a good or service at a lower
opportunity cost compared with producers
– We produce aircraft….. South Korea produces
televisions.
International Example: The Comparative Advantage of Desert
Dairies
• Research has found that camel’s milk contains
10 times more iron per unit than cow’s milk,
not to mention antibodies that help fight
cancer.
• Most of these camels are located in Africa and
the Middle East, which enables residents of
nations in those regions to produce camel’s
milk at a lower opportunity cost compared
with other nations.
Specialization among nations
– To demonstrate the concept of comparative
advantage, consider a simple two-country, twogood world.
– To benefit from specialization and trade, a country
only needs a comparative advantage. (which one
has the lower opportunity cost.)
– Let’s break it down. Two people….
A Timeline for Trade
•
•
Ex Ante
Phrase that means
before,” as in before a
trade.
•
Ex Post
•
Phrase that means
“after,” as in after a
trade.
Ex Ante
Elizabeth and Brian Before the Trade
Elizabeth decides to produce 20 loaves bread Brian decides to produce 30
apples
Terms of trade = Elizabeth trades 8 loaves for Brian’s 12 apples
Ex Post
Remember terms of trade 8 loaves for 12 apples….
Elizabeth now consumes 12 loaves bread and 12 apples
Brian consumes 8 loves of bread and 18 apples
Clearly both are better off… See first column above!
Trade works…. But free trade works great.
Video
http://educationportal.com/academy/lesson/comparativeadvantaged-definition-and-examples.html
Why We Trade: Comparative Advantage and Mutual Gains From
Exchange (cont'd)
• Specialization is the key
– Specializing in producing goods for which a nation
has a comparative advantage allows for greater
efficiency.
– Production capabilities increase, making possible
greater worldwide consumption through
international trade.
How do countries know when they have a comparative advantage in
the production of a good?
• a.Government accountants collect cost data from countries
and analyze it to find out which country has a comparative
advantage in the production of which good.
• b.They know as the result of individuals trying to earn profits
and buying low and selling high in the process.
• c.The United Nations Economic Conference Group analyzes
cost data from countries and determines which country has a
comparative advantage in the production of which good.
• d.There is not one major way that countries acquire this
information.
Distributional Effects and Trade
Restrictions
 The benefits of international trade are not equally
distributed to all individuals in the population.
 Benefit occurs on net (gains minus losses).
 Every individual person may not gain, in fact some
may lose.
 Unfavorable distributional effects may lead to trade
restrictions such as:
 Tariff - A tax on imports.
 Quota - A legal limit on the amount of a good that may be
imported.
Consumers’ Surplus
As the shaded area
indicates, the difference
between the maximum or
highest amount
consumers would be
willing to pay and the
price they actually pay is
consumers’ surplus.
Producers’ Surplus
As the shaded area
indicates, the difference
between the price sellers
receive for the good and
the minimum or lowest
price they would be
willing to sell the good
for is producers’ surplus.
Why Restrict Trade?
 National–Defense Argument – certain industries are
necessary to the national defense.
 Infant-Industry Argument – new industries often need
protection from older, established foreign firms.
 Antidumping Argument – foreign competitors will sell goods
at below cost of production so as to penetrate markets
 Low-Foreign-Wage Argument- Domestic producers pay high
wages to their workers and foreign producers pay low wages
to their workers
 Saving-Domestic-Jobs Argument – Foreign producers displace
domestic workers.
GEOPOLITICAL ECONOMIC WORLD
Why does the U.S. have to worry
about the global economy?
Why can’t we just produce for
ourselves and forget the rest of the
world?
Why Trade???
Think about your life without trade:
1. You wake up early in small,drafty house that you
built yourself.
2. Put on your clothes that you wove yourself from
shearing the sheep in your yard.
3. Pluck a few coffee beans off a tree that does not
grow well in Wisconsin all the while hoping that
your hen laid at least one egg overnight.
OUR STANDARD OF LIVING IS HIGH BECAUSE WE
ARE ABLE TO FOCUS ON WHAT WE DO BEST
AND TRADE FOR THE REST!
The U.S., when established, set up one very
large trade zone… freely trading with other
states.
When countries trade among themselves,
the result can be the same… word “freely”
is the culprit.
Bottom Line for Trade
1. Productivity is what makes us rich.
2. Specialization is what makes us
productive.
3. Trade allows us to specialize
Trade Creates Losers
Any discussion of globalization immediately
brings up “loss of jobs.” Dallas has
experienced some heavy blows in this
arena.
It’s hard to explain to the Levi workers in
south Texas or elsewhere why they have no
employment, but that Indonesia has all the
work it can handle from Levi.
Trade, like technology, CAN DESTROY jobs,
particularly low-skilled jobs.
What is the objective for every firm?
PROFIT MAXIMIZING.
The key question again rolls back to
productivity. If the worker in Bangladesh is
“relatively” productive for a less costly
labor rate, then the firm will do a CBA (cost
benefit analysis).
If the firm is receiving negative Customer
Service replies (Dell, outsourcing of tech
support), they may decided to pull labor for
that service back into the U.S.
4 Ways government commonly interferes with
trade
1. Protective tariffs. (are excise taxes or
duties placed on imported goods)… Purpose.
To “protect” shield domestic producers from
foreign competition
Figure 33-4 The Effect of a Tariff on Japanese-Made Laptop
Computers, Panel (a)
Japanese-made
notebook computers
What about “protecting” our U.S. jobs?
PROTECTIONISM SAVES JOBS IN THE SHORT RUN….
AND SLOWS ECONOMIC GROWTH IN THE LONG
RUN….
(RETALIATION CAN BE EXPECTED)
See Smoot-Hawley Tariff
Lowering trade barriers has the same impact on
consumers as cutting taxes
(Wright Amendment is protectionism-which I am
happy to report was repealed by Congress
9/30/06) (goes into effect 2014)
2. Import Quotas….
A limit on the amount of any specified good
that can enter the country over a fixed
period.
(example: Only X # of bottles of Cognac can
be imported)
Figure 33-3 The Effect of Quotas on
Textile Imports
Equilibrium with restrictions
Equilibrium without restrictions
3. Nontariff barriers
(Just a way around allowing imports into the
country by establishing standards that
could not be complied with and yards of
red tape to hassle with)… Countries will
just forget trading with that country and
go someplace else to trade.
4. Export Subsidies
Government pays (subsidies- gives dollars to)
domestic producers of export goods.
This reduces their production costs, lowers their
taxes and allows producers to charge lower
prices and sell more exports.
Legislation (Oct 2004) ceased most of this
arrangement with Am companies… WTO
sanctioned American trade for unfair subsidies,
and Congress finally had to comply.
Figure 33-5 Tariff Rates in the United
States Since 1820
Source: U.S. Department of Commerce.
A word about rate of currency
exchange
 The U.S. Dollar most widely accepted for of
currency in the world
 Fluctuation of dollar replicates the fluctuation of
the supply and demand for the currency.
 Dollar in relation to Yen, Euro, etc is calculated for
international trade
 As importer – if dollar is down – have to pay more
for goods coming into U.S. to sell
 As exporter – if dollar down – country receiving
goods pays less for American goods.
More words for exchange
 If you are selling jeans to Germany, there are
two ways to consummate the sale.
 1) Spot transaction – have to quote a price in
either dollars and euros. A price is agreed to –
but exchange rate might change before deal is
completed. Either party may profit or lose
since it is a floating rate.
Words continued
 2.) Second way to complete the exchange of jeans
to Germany. Just wait until ready to ship and
purchase the euros needed to pay the company
receiving the goods.
 Buyer and seller have to agree which currency
they want to pay and receive.
 Exchange banks open 24 hours – 5 days a week.
 Many people speculate and invest in currency to
gain financial profit for the trade.
Currency Converter
“No nation was ever ruined by
trade.”
Benjamin Franklin
* Sometime in your life, read the “Petition
of the Candlemakers 1845 …” by Bastiat