Transcript Chapter 1 - McGraw Hill Higher Education

Chapter 13
International trade
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Learning objectives
1.
In what sense does free trade contribute to the welfare of a
country’s citizens?
2.
Under what circumstances will a country have a comparative advantage in
the production of a commodity?
3.
Under what circumstances will an economy be a net importer of a good
or service?
4.
Under what circumstances will an economy be a net exporter of a good
or service?
5.
Which groups in society win and which groups lose when an economy
moves to free trade?
6.
What are the effects of a tariff on (a) consumers, (b) producers and
(c) the government?
7.
What are the effects of a quota on (a) consumers, (b) producers and
(c) the government?
8.
In what sense is protectionism inefficient?
9.
What are the main arguments in the debate about whether free trade has
harmful environmental effects? What does the empirical evidence suggest?
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Chapter organisation
13.1
Open-economy issues
13.2
Production and consumption possibilities and
the benefits of trade
13.3
A supply and demand perspective on trade
13.4
Protectionist policies: Tariffs and quotas
Summary
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Issues in globalisation
• The increasing degree of integration of countries
into the global economy has given rise to some
key issues:
– Why has globalisation come about?
– Is it true that the gains from free trade are illusory?
– What are the arguments?
– What is the evidence?
• An understanding of the basis for international trade
is necessary to address the aforementioned issues.
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Chapter organisation
13.1
Open-economy issues
13.2
Production and consumption possibilities
and the benefits of trade
13.3
A supply and demand perspective on trade
13.4
Protectionist policies: Tariffs and quotas
Summary
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Production possibilities curve (PPC)
for a one-worker economy
Figure 13.1 Production possibilities curve (PPC) for a one-worker economy
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Production possibilities curve for a
two-worker economy
Figure 13.2 Production possibilities curve for a two-worker economy
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Production possibilities curve for a
three-worker economy
Figure 13.3 Production possibilities curve for a three-worker economy
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Production possibilities curve for a
many-worker economy
Figure13.4 Production possibilities curve for a many-worker economy
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Consumption possibilities without
international trade
• Consumption possibilities refer to the combination of
goods and services that can feasibly be consumed.
• Autarky refers to a country whose economy is closed
to the rest of the world.
– The country is economically self-sufficient, producing
everything its citizens consume.
• In a closed economy, its PPC is also its consumption
possibilities.
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Consumption possibilities and the
terms of trade
Figure 13.5 Brazil’s consumption possibilities with trade
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Consumption possibilities in a manyworker economy
Figure 13.6 Consumption possibilities in a many-worker economy
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Comparative advantage
Figure 13.7 Comparative advantage
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Production in autarky
Figure 13.8 Production in autarky
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Production with international trade
Figure 13.9 Production and consumption possibilities once trade is opened
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Sources of comparative advantage
• Potential sources of comparative advantage
– Climate and resource endowments
– Stock of knowledge and experience
– Cultural factors
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Chapter organisation
13.1
Open-economy issues
13.2
Production and consumption possibilities and
the benefits of trade
13.3
A supply and demand perspective on trade
13.4
Protectionist policies: Tariffs and quotas
Summary
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Import demand
Figure 13.10 The market for computers in Brazil
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Export supply
Figure 13.11 The market for coffee in Brazil
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Winners and losers from trade
• If trade is so wonderful, why do some groups resist
free trade and globalisation?
• In general, domestic consumers of imported goods
benefit from free trade, as more goods are available
at a lower price, e.g. Brazilian computer buyers.
• However, in general, domestic producers of imported
goods are hurt by free trade, as a smaller quantity of
goods is sold at a lower price, e.g. Brazilian computer
sellers and workers hurt.
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Winners and losers from trade (cont.)
• The opposite is true for exports.
• In general, domestic producers of exported goods
benefit from free trade, as more goods are sold at
higher prices, e.g. Brazilian coffee producers.
• However, in general, domestic consumers of
exported goods are hurt by free trade, as a smaller
quantity of goods is bought at a higher price, e.g.
Brazilian coffee consumers.
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Winners and losers from trade (cont.)
• Free trade is efficient, in that it increases the size of
the pie available to the economy.
• However, some groups lose from trade, which
generates political pressure to block or restrict trade.
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Chapter organisation
13.1
Open-economy issues
13.2
Production and consumption possibilities and
the benefits of trade
13.3
A supply and demand perspective on trade
13.4
Protectionist policies: Tariffs and quotas
Summary
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Protectionist policies: Tariffs and
quotas
• Protectionism is the view that free trade is injurious
and domestic markets should be protected through
legal barriers to imports.
• The most common barriers are tariffs and quotas.
– A tariff is a tax imposed on an imported good.
– A quota is a legal limit on the quantity to be imported.
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Tariff
Figure 13.12 The market for computers after the imposition of an import tariff
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Example: Impacts of a tariff
• Suppose demand = QD = 3000 – 0.5Pc and supply =
QS = 1000 + 0.5Pc.
• Then in a closed economy, equilibrium occurs where
QD = QS:
3000 – 0.5Pc = 1000 + 0.5Pc
Pc = $2000 and Q = 2000 computers.
• Assume the economy opens to trade and the world
price is $1500, then:
QD = 3000 – 0.5(1500) = 2250
and QS = 1000 +0.5(1500) = 1750
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Example: Impacts of a tariff (cont.)
• Imports = 2250 – 1750 = 500 computers per year
• A tariff of $300 per computer raises the import prices
from $1500 to $1800, so demand will be 3000 –
0.5(1800) = 2100 computers and domestic supply =
1000 + 0.5(1800) = 1900 computers.
• Imports will then be 2100 – 1900 = 200 per year.
Revenue collected by the government =
$300/imported computer X 200 computers/year
= $60 000/year
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Winners and losers from tariffs
• Consumers lose from higher prices.
• Domestic producers gain from selling more
computers and getting higher prices for them.
• Governments gain from tariff revenue.
• Overall, society is worse off as a result of the tariff.
Consumers lose more than producers and
government gain.
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Quota
Figure 13.13 The market for computers after the imposition of an import quota
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Example: Impacts of a quota
• Suppose the government imposes a quota of 200
imported computers.
• This adds 200 computers at each level of domestic
production, so domestic supply + quota
= 1000 + 0.5Pc + 200
• New equilibrium where 1200 + 0.5Pc = 3000 – 0.5Pc
Pc = $1800, total demand = 3000 – 0.5(1800) = 2100,
of which 200 will be imported and 1900 domestically
produced.
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Free trade versus quotas
• Relative to free trade, the quota:
– raises the domestic price above the world price, to pT
– reduces domestic purchases from qD to q’D
– increases domestic production of computers, from qS to q’S
– reduces imports to the quota level, q’D – q’S .
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Tariffs versus quotas
• A quota or a tariff that restricts imports to the same
quantity, which is less than the free trade quantity, will
have the same outcomes in the economy, with one
exception.
• Instead of governments receiving the tariff revenue,
the revenue goes to the holders of the import
licenses, who can buy the computers at the world
price and sell them in the domestic market for the
higher price.
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The inefficiency of protectionism
• Free trade is efficient because it allows countries to
specialise in goods and services in which they have a
comparative advantage. This means the total
economic pie is bigger for everyone.
• However, there are some who benefit from trade
restrictions, and these people tend to be better
organised politically than those who lose from trade
restrictions.
• A better alternative to trade restrictions is to allow
free trade and compensate the losers.
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The inefficiency of protectionism
(cont.)
• Another complaint is that free trade harms the
environment.
• The efficiency principle suggests that restricting free
trade is not the most effective means of achieving
environmental goals, as it reduces the level of
resources able to deal with the problems.
• Economists have argued there exists an
environmental Kuznets curve: as poor countries
develop, their pollution level increases to a point, at
which further development reduces pollution.
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The environmental Kuznets curve
Figure 13.14 The environmental Kuznets curve
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Chapter organisation
13.1
Open-economy issues
13.2
Production and consumption possibilities and
the benefits of trade
13.3
A supply and demand perspective on trade
13.4
Protectionist policies: Tariffs and quotas
Summary
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Summary
• A nation’s PPC summarises the available points of
efficient production by showing, when holding the
production of all other commodities fixed, what is the
maximum amount of a commodity that can be
produced.
• In autarky, the consumption set comprises only those
combinations of goods that can be produced.
• Under free trade, it is possible that the consumption
set is expanded beyond what can be produced
locally.
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Summary (cont.)
• There are always winners and losers from free trade.
• Protectionist measures such as tariffs and quotas can
be justified if the winners are willing and able to
compensate the losers.
• Empirical studies suggest that the free tradeenvironment nexus is complex, though most findings
agree that pollution is lower in rich, open countries.
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