Transcript Participants in International Trade

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The U.S in the Global Economy
Mc Connell and Brue Chapter 5
Chapter Objectives
• Comparative Advantage, Specialization, and
International Trade
• How Exchange Rates are Determined in
Currency Markets
• How and Why Government Sometimes
Interferes with Free International Trade
• Role Played by Free-Trade Zones and the WTO
in Promoting International Trade
International Linkages
Trade Flows
Goods & Services
United
States
Economy
Resource Flows
Capital & Labor
Information &
Technology Flows
Information & Technology
Financial Flows
Money
Other
National
Economies
International Linkages
• Trade Flows
• Capital and Labour Flows: U.S firms establish
production facilities abroad and foreign firms
in U.S
• Information and Technology Flows: Transmits
information to other nations about U.S
products, prices etc
• Financial Flows: Imports, buying assets, aid,
interest
United States and World Trade
Volume and Pattern
Exports of Goods & Services – 2005
Selected Countries as a Percent of GDP
Belgium
Netherlands
South Korea
Germany
Canada
New Zealand
Italy
France
United Kingdom
Spain
Japan
United States
87%
71%
44%
40%
38%
28%
27%
26%
26%
25%
13%
11%
Source: IMF, International Financial Statistics, 2005
The U.S and World Trade
• Volume of international trade has been
increasing both absolutely and relative to
GDPs of countries
• U.S now accounts for a smaller percentage of
total world trade
• World trade for other countries has increased
more rapidly
• Still leads volume wise
United States and World Trade
Volume and Pattern
U.S. Trade as a Percentage of GDP
Inflation Adjusted to Dollar Value in 2000
18
Imports
Percentage of GDP
16
14
12
10
8
6
4
Exports
2
0
1975
1980
1985
1990
1995
2000
2005
Source: Bureau of Economic Analysis
Trade Pattern
• Trade deficit : Imports exceed exports (goods)
• Trade surplus: Exports exceed imports
(services)
• Same category goods can be both imported
and exported at the same time
United States and World Trade
Volume and Pattern
Principal U.S. Exports & Imports – 2005
in Billions of Dollars
Exports
Chemicals
Consumer Durables
Agricultural Products
Semiconductors
Computers
Generating Equipment
Automobiles
Aircraft
Medical
Telecommunications
Imports
$68.6
53.5
52.9
47.2
45.5
33.2
30.4
29.1
27.6
25.6
$251.6
Petroleum
123.7
Automobiles
97.1
Household Appliances
93.3
Computers
Metals
83.8
Clothing
79.1
Consumer Electronics
47.3
Generating Equipment
43.1
Semiconductors
37.1
25.8
Telecommunications
Source: Department of Commerce Data
United States and World Trade
Volume and Pattern
U.S. Exports & Imports – 2005
in Goods by Area
Exports to
Industrial Countries
Developing Countries
Total
Value
Billions
Of Dollars
$483
410
$893
Imports from
Industrial Countries
Developing Countries
Total
Value
Billions
Of Dollars
$770
904
$1,674
Source: Survey of Current Business, April 2006
Financial Linkages
• How are deficits funded?
-Borrowing from foreigners
-Selling assets to foreigners
Rapid Trade Growth
• Transportation Technology
-High transport costs are a barrier to trade
-Advancement and Improvements
-Oil in massive tankers
-Gas exported through pipelines
Rapid Trade Growth
• Communication Technology
-Computers, internet, fax
-Link Traders and access overseas markets
-Money movement
-Information (e.g. exchange rates)
Rapid Trade Growth
• Decline in Tariffs:
-Excise taxes or duties on imported goods
-Fallen since 1940
-Increased International Trade
United States and World Trade
Participants in International Trade
Comparative Exports - 2004
0 100
Germany
United States
China
Japan
France
Netherlands
Italy
United Kingdom
Canada
Belgium
South Korea
Mexico
Russia
Taiwan
Singapore
200
300
400
500
600
700
800
900
$912
$819
$593
$566
$449
$358
$349
$347
$317
$307
$254
$189
$184
$183
$180
Billions of Dollars
Source: World Trade Organization
Specialization and Comparative
Advantage
• Open economy leads to more production of
certain goods (exports) and less of others
(imports)
• Do such resource shifts make economic sense?
• Increase productivity of a nations resources and
allow for greater output and income
• Ricardo: specialize even if some other economy is
more productive in all economic activities
Absolute Advantage
• Simpifying Assumptions:
a)Constant cost (no economies or diseconomies
of scale)
b)Two countries two product case
c)Each country must give up a constant amount
of one product to secure an increment in the
other
d)Equal labour force
Absolute Advantage
Mexico
Product
A
B
C
D
E
Avocados
0
20
24
40
60
Soyabeans
15
10
9
5
0
U.S
Product
A
B
C
D
E
Avocados
0
30
33
60
90
Soyabeans
30
20
19
10
0
Absolute Advantage
• Output per worker in U.S exceeds that in
Mexico
• U.S has an absolute advantage relative to
Mexico in producing both goods
• Gains from specialization? Possible if the
comparative cost of producing the two goods
within the nations differ
Comparative Advantage
To obtain 5 tons of soyabeans, 20 tons of avocados must be given up. This
implies that it costs 1 ton of soyabeans to produce 4 tons of avocados.
1S=4A
Or
1A=1/4 S
Mexico
Product
A
B
C
D
E
Avocados
0
20
24
40
60
Soyabeans
15
10
9
5
0
Comparative Advantage
It costs 10 tons of soyabeans to produce 30 tons of avocados. In other words
1 ton of soyabeans must be given up to produce 3 tons of avocados
1S=3A
Or
1A=3S
U.S
Product
A
B
C
D
E
Avocados
0
30
33
60
90
Soyabeans
30
20
19
10
0
Comparative Advantage
• U.S has comparative advantage over Mexico in
Soyabeans (1S=3A vs 1S=4A)
• Mexico has comparative advantage over U.S in
Avocados (1A=1/4S vs 1A=1/3S)
• So a country has said to have a comparative
advantage in a product when it can produce
that product at a lower domestic opportunity
cost than a potential trading partner
Comparative Advantage
• So if both countries specialize in the product
in which they have a comparative advantage:
-Both countries will achieve a larger total output
with the same inputs
-Better and efficient use of scarce resources
Terms of Trade
• U.S can shift production between soyabeans
and avocados at rate of 1S for 3A
• Trade beneficial to U.S only if it could obtain
more than 3A for 1S
• For Mexico trade beneficial if it could get 1S
for less than 4A
• 1S for 3.5A
Gains from Trade
Country
before
after
Amount
traded
Outputs
available
after trade
Gains from
trade
Mexico
24A
9S
60A
0S
-35A
+10S
25A
10S
1A
1S
U.S
33A
19S
0A
30S
+35A
-10S
35A
20S
2A
1S
Improved Resource Allocation
Same total inputs produce more output
Problem of production constraints are over come
No shift in PPF of either country
Foreign Exchange Market
• Seller set prices in terms of their domestic
currencies
• Foreign Exchange Market: Market where various
national currencies are exchanged for one
another
• Equilibrium prices in such countries are called
Exchange rates
• Enable consumers in one country to translate
prices of goods into units of their own currency
Example
• U.S dollar-yen rate is $0.1 per Yen
• Television costing 20,000 Yen will cost?
• If exchange rate rises to $0.2?
The Foreign Exchange Market
Exchange Rates
Dollar – Yen Market
P
Sy
Dollar price of 1 yen
Exchange Rate:
$.01=¥1
.01
Dy
Qe
Quantity of yen
Q
Depreciation
• Anything that changes demand for yen will
increase its dollar price
-Incomes rising in U.S: more demand for imports
-Change in peoples taste
• When dollar price of yen increase we say a
depreciation of dollar has occurred relative to
yen
• Depreciated Dollar buys fewer yens, fewer
imports and more exports for U.S
Appreciation
• If Japense demanded more U.S goods: Supply
of Yen will increase
• Dollar price for Yen will decline
• Decrease in Dollar price of Yen is called the
appreciation of the dollar in terms of Yen
• Fewer dollars to buy Yen
• U.S imports of Japanese goods rise , exports
fall
The Foreign Exchange Market
Exchange Rates
Changing Rates:
Depreciation and Appreciation
Dollar Price of
Foreign
Currency
Rises
Equals
Equals
Foreign
Currency Price
Of Dollar
Falls
International
Value of Dollar
Falls (Dollar
Depreciates)
Equals
Equals
International
Value of Foreign
Currency Rises
(Foreign Currency
Appreciates)
Government and Trade
• What kinds of trade barriers can governments
erect and why?
Trade Impediments and Subsidies
-Protective tariffs are excise taxes or duties
placed on imported goods
-Shield domestic production from foreign
competition
-Impede trade by raising price of imported
goods
Trade Impediments and Subsidies
• Import Quotas are limits on quantities or total
value of specific items that may be imported
-Impede trade more than tariffs
• Nontariff barriers
-Licensing requirements
-Unreasonable standards pertaining to product
quality
Trade Impediments and Subsidies
• Export Subsidies are government payments to
domestic producers of exported goods
-Reduced costs, high production
-Airbus subsidized to compete with Boeing
-Agricultural Products
Why does the Government Intervene?
• Misunderstanding Gains from trade
-Myth: Greatest benefit is greater domestic
employment in export sector
-True benefit: Overall increase in output through
specialization
-Gains from trade :Extra output obtained from
abroad for less cost than the cost to produce
at home
Why does the Government Intervene?
• Political Considerations
-Trade harms particular domestic industries and
groups of resource suppliers
-Persuade government to give protection
-Pursue political activity
-Cost per person is very small
Costs to society
• Hurt consumers
• Hurt producers who import inputs
• Less competition: less incentive for cost saving
Multilateral Trade Agreements and
Free Trade Zones
• Retaliation: Trade War
• Smoot-Hawley Tariff Act of 1930
-Meant to reduce imports and stimulate local
production
-International Trade fell (contributed to Great
Depression)
Reciprocal Trade Agreement Act
• 1934-Aimed at reducing tariffs
-Negotiating Authority: Reduce tariffs by 50%
-Generalized Reductions: Most Favoured Nation
Clause
General Agreement on Tariffs and
Trade
• 1947,23 nations, forum for negotiation
• Three basic principles
1)Equal non discriminatory trade treatment for all
members
2)Reduction of tariffs multinational level
3)Elimination of import quotas
• Uruguay Round 1995: Tariffs on my products
eliminated, dropped by 33%
-Quotas replaced by tariffs
-Subsidies to farmers and intellectual property rights
WTO
• Formed as GATT’s successor in Uraguay Round
• 143 members
• Oversees trade agreements and rules over
trade disputes
• Acts against protectionism called for by
interest groups
WTO
• Critics: Rules enable firms to circumvent national
laws that protect workers and environment
• Proponents:
-Pursue environmental and labour protection
through other organizations
-Concerns are overblown
-Most trade is amongst developed countries
-Free Flow of goods raises output and income level
European Union
• Regional Free Trade Zones are called Trade
Blocs
• Initiated in 1958
• Has 25 members
• Abolished tariffs and quotas on products
traded among members
• Common trade policy for non members
• Common policies in other economic matters
European Union
• Free flow of goods and services creates large
markets for industries
• Low cost achieved through economies of scale
• Greater output, greater economic growth
• Effects on other countries:mixed
-Better export customers
-Tariffs make it difficult to compete with firms
within EU bloc
European Union
• Reduces trade with non members
• Euro-12 countries
• Ends inconvenience and expense of
exchanging currencies
NAFTA
• Formed in 1993 by Canada, America and
Mexico
• Greatly reduced tariffs and barriers
• Criticism: Loss of U.S jobs
• Enhanced standard of living in all 3 countries
• Reduced unemployment in U.S
Global Competition
• Globalization
• Improves standard of living vs impact on poor
and environment
• U.S firms prospered in global market
• Increases competition : Lower costs
• Is the increased competition good?