Transcript International Econ. Power Point

International Trade
• All economies, regardless of their size,
depend to some extent on other
economies and are affected by events
outside their borders. (Trade / Location of Business)
• The “internationalization” or
“globalization” of the U.S. economy has
occurred in the private and public sectors,
in input and output markets, and in
business firms and households.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Trade Surpluses and Deficits
U.S. Balance of Trade (Exports Minus Imports), 1929 – 1999 (Billions of Dollars)
EXPORTS MINUS IMPORTS
EXPORTS MINUS IMPORTS
1929
+ 0.4
1984
– 102.0
1933
+ 0.1
1985
– 114.2
1945
– 0.9
1986
– 131.9
1955
+ 0.4
1987
– 142.3
1960
+ 2.4
1988
– 106.3
1965
+ 3.9
1989
– 80.7
1970
+ 1.2
1990
– 71.4
1975
+ 13.6
1991
– 20.7
1976
– 2.3
1992
– 27.9
1977
– 23.7
1993
– 60.5
1978
– 26.1
1994
– 87.1
1979
– 24.0
1995
– 84.3
1980
– 14.9
1996
– 89.0
1981
– 15.0
1997
– 89.3
1982
– 20.5
1998
– 151.5
1983
– 51.7
1999
– 254.0
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Absolute Advantage Versus
Comparative Advantage
• A country enjoys an absolute advantage
over another country in the production of a
product if it uses fewer resources to produce
that product than the other country does.
• A country enjoys a comparative advantage
in the production of a good if that good can
be produced at a lower cost (Opp. Cost) in
terms of other goods.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Mutual Absolute Advantage
YIELD PER ACRE OF WHEAT AND COTTON
Wheat
Cotton
NEW ZEALAND
AUSTRALIA
6 bushels
2 bales
2 bushels
6 bales
• In this example, New Zealand can produce three
times the wheat that Australia can on one acre of
land, and Australia can produce three times the
cotton. We say that the two countries have mutual
absolute advantage.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Mutual Absolute Advantage
• Suppose that each country divides its land to obtain
equal units of cotton and wheat production.
TOTAL PRODUCTION OF WHEAT AND COTTON
ASSUMING NO TRADE, MUTUAL ABSOLUTE
ADVANTAGE, AND 100 AVAILABLE ACRES
NEW ZEALAND
AUSTRALIA
Wheat
25 acres x 6 bushels/acre
150 bushels
75 acres x 2 bushels/acre
150 bushels
Cotton
75 acres x 2 bales/acre
150 bales
25 acres x 6 bales/acre
150 bales
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Production Possibility Frontiers for Australia
and New Zealand Before Trade
• Because both countries have an absolute advantage
in the production of one product, specialization and
trade will benefit both.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Gains from Specialization
• An agreement to trade 300 bushels of wheat for
300 bales of cotton would double both wheat and
cotton consumption in both countries.
PRODUCTION AND CONSUMPTION OF WHEAT
AFTER SPECIALIZATION
PRODUCTION
NEW
ZEALAND
Wheat
Cotton
AUSTRALIA
100 acres x 6 bu/acre
600 bushels
0 acres
0
© 2002 Prentice Hall Business Publishing
75 acres x 2 bu/acre
150 bushels
100 acres x 6 bales/acre
600 bales
Principles of Economics, 6/e
CONSUMPTION
NEW
ZEALAND
AUSTRALIA
300 bushels
300 bushels
300 bales
300 bales
Karl Case, Ray Fair
Gains from Specialization
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Gains from Comparative Advantage
• Even if a country had a considerable
absolute advantage in the production of
both goods, specialization and trade are
still mutually beneficial.
• When countries specialize in producing the
goods in which they have a comparative
advantage, they maximize their combined
output and allocate their resources more
efficiently.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Gains from Comparative Advantage
• The real cost of producing
cotton is the wheat that must
be sacrificed to produce it.
• A country has a comparative
advantage in cotton production
if its opportunity cost, in terms
of wheat, is lower than the
other country.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Exchange Rates
• When trade is free—unimpeded by
government-instituted barriers—patterns of
trade and trade flows result from the
independent decisions of thousands of
importers and exporters and millions of
private households and firms.
• To understand these patterns we must
know something about the factors that
determine exchange rates.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Exchange Rates
• An exchange rate is the ratio at which two
currencies are traded. The price of one
currency in terms of another.
• For any pair of countries, there is a range of
exchange rates that can lead automatically
to both countries realizing the gains from
specialization and comparative advantage.
• Exchange rates determine the terms of
trade.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Exchange Rate Shifters
• Tastes / Preferences – Desire for products.
• Price Levels (Inflation) – Higher prices in
one country causes others to demand less
of their goods.
• Income – When people in a certain country
see and increase in income they will buy
more foreign goods.
• Interest Rates – Invest to get a big return.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Trade Barriers: Tariffs,
Export Subsidies, and Quotas
• Protection is the practice of shielding a
sector of the economy from foreign
competition.
• A tariff is a tax on imports.
• Export subsidies are government payments
made to domestic firms to encourage exports.
Closely related to subsidies is dumping. A
firm or industry sells products on the world
market at prices below the cost of production.
• A quota is a limit on the quantity of imports.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Trade Barriers: Tariffs,
Export Subsidies, and Quotas
• The Smoot-Hawley tariff was the U.S. tariff
law of the 1930s, which set the highest tariff in
U.S. history (60 percent). It set off an
international trade war and caused the decline
in trade that is often considered a cause of the
worldwide depression of the 1930s.
• The General Agreement on Tariffs and
Trade (GATT) is an international agreement
singed by the United States and 22 other
countries in 1947 to promote the liberalization
of foreign trade.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Economic Integration
• Economic integration occurs when two
or more nations join to form a free-trade
zone.
• The European Union (EU) is the
European trading bloc composed of
Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal,
Spain, Sweden, and the United Kingdom.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Economic Integration
• The U.S.-Canadian Free-Trade Agreement
is an agreement in which the United States
and Canada agreed to eliminate all barriers
to trade between the two countries by 1988.
• The North American Free-Trade
Agreement (NAFTA) is an agreement
signed by the United States, Mexico, and
Canada in which the three countries agreed
to establish all of North America as a freetrade zone.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The North American Free-Trade
Agreement (NAFTA)
• The U.S. Department of Commerce has
estimated that as a result of NAFTA trade
between the United States and Mexico
increased by nearly $16 billion in 1994.
• In addition, exports from the United States
to Mexico outpaced imports from Mexico.
• By 1998, a general consensus emerged
among economists that NAFTA had led to
expanded employment opportunities on
both sides of the border.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The Case for Free Trade
• The case for free trade is based on the
theory of comparative advantage. When
countries specialize and trade based on
comparative advantage, consumers pay
less and consume more, and resources
are used more efficiently.
• When tariffs and quotas are imposed,
some of the gains from trade are lost.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The Case for Protection
• Protection saves jobs
• Some countries engage in unfair trade
practices
• Cheap foreign labor makes competition
unfair
• Protection safeguards national security
• Protection discourages dependency
• Protection safeguards infant industries
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair