Transcript Coffee (pounds/year)

International Trade
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Introduction

Understanding the Economic Issues of
International Trade
The benefits of trade
 The costs of trade
 The economic impact of trade restrictions

Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 2
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
Comparative Advantage
as a Basis for Trade
The principle of comparative advantage
tells us that we can all enjoy more
goods and services when each country
produces according to its comparative
advantage, and then trades with other
countries.
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 3
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
Closed Economy


Production and Consumption
Possibilities and the Benefits of Trade
An economy that does not trade with the
rest of the world
Open Economy

An economy that trades with other
countries
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 4
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Production Possibilities
Curve for a Many-Worker Economy
A
Observations
• The OC of producing an
additional unit = the slope of
the line that touches the point
• OC will increase as output of
on good increases
C
Coffee (pounds/year)
100,000
D
40,000
B
1,000
2,000
Computers (number/year)
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 5
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Production and Consumption
Possibilities and the Benefits of Trade

A country’s PPC shows the quantities of
different goods that its economy can
produce.

Consumption Possibilities

The combinations of goods and services
that a country’s citizens might feasibly
consume
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 6
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
Production and Consumption
Possibilities and the Benefits of Trade
In a closed economy:
Society’s production possibilities =
consumption possibilities.
 If a country is self-sufficient, it is called
autarky.

Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 7
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
Production and Consumption
Possibilities and the Benefits of Trade
In an open economy:

The society’s consumption possibilities are
typically greater than its production
possibilities.
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Chapter 9: International Trade
Slide 8
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Buying and Selling in World Markets
150,000
Coffee (pounds/year)
120,000
A
C
Assume:
• Producing at D
• Closed economy
• World price of coffee = $10/lb and
computer = $500
100,000
D
50,000
B
1,000
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Companies, Inc. All rights reserved.
2,000 2,400
Computers/year
Chapter 9: International Trade
3,000
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Buying and Selling in World Markets
150,000
Coffee (pounds/year)
120,000
E
Consumption
possibilities
A
C
100,000
Observation:
• Sell 2,000 computers @ $500
• Take the $1million and buy 100,000
pounds of coffee
• Consumption possibilities of 150,000 is
greater than PPC without trade
D
50,000
Production
possibilities
B
1,000
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
2,000 2,400
Computers/year
Chapter 9: International Trade
F
3,000
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Buying and Selling in World Markets
150,000
Coffee (pounds/year)
120,000
E
Consumption
possibilities
A
C
Observation:
• Start at D
• Sell 50,000 lbs of coffee
• Buy 1,000 computers with the $500,000
• Pt F is possible with trade but not on the PPC
100,000
D
50,000
Production
possibilities
B
1,000
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
2,000 2,400
Computers/year
Chapter 9: International Trade
F
3,000
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Production Possibilities, Consumption Possibilities,
and the Optimal Production Mix for an Open Economy
160,000
150,000
L
Consumption
possibilities
E
Coffee (pounds/year)
120,000
100,000
• 50 lbs of coffee trades for 1 computer
• LM = consumption possibilities
• G is the optimal combination for Costa Rica
• Costa Rica can use trade to locate anywhere
along LM
A
C
G
50,000
D
Production
possibilities
B
1,000
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
2,000 2,400
Computers/year
Chapter 9: International Trade
F
M
3,000 3,200
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Production Possibilities, Consumption Possibilities,
and the Optimal Production Mix for an Open Economy
160,000
150,000
L
Consumption
possibilities
E
Coffee (pounds/year)
120,000
100,000
Why produce at G?
• Slope of the PPC = LM
• Domestic and international opportunity costs
of acquiring an extra computer (in terms of
forgone coffee) are equal
A
C
G
50,000
D
Production
possibilities
B
1,000
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
2,000 2,400
Computers/year
Chapter 9: International Trade
F
M
3,000 3,200
Slide 13
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A Straight-Line Production
Possibilities Curve
Coffee (pounds/year)
800
600
A
B
Observation
• The tradeoff between
coffee and tea is
constant at any point
on the PPC
C
200
D
200
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600
Tea (pounds/year
Chapter 9: International Trade
800
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Two Consumption Possibilities Curves
Consumption possibilities curve
when the world price of coffee is
twice the world price of tea
Coffee (pounds/year)
800
600
A
• Islandia produces at A
• Islandia can use the money
earned from selling 800 lbs
of coffee to choose any
combination on AD’
B
C
200
D
200
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600
800
Tea (pounds/year
Chapter 9: International Trade
D’
1,600
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Two Consumption Possibilities Curves
Coffee (pounds/year)
1,600
A’
Consumption possibilities curve
when the world price of tea is
twice the world price of coffee
800
600
200
A
• Islandia produces at D
• Islandia can choose any
combination on A’D
B
C
D
200
600
800
Tea (pounds/year
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 16
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
Consumption Possibilities With
and Without International Trade
What Do You Think?

Where should Islandia produce if the price
of coffee and tea were the same?
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Chapter 9: International Trade
Slide 17
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
Consumption Possibilities With
and Without International Trade
Observations
With a bow-shaped PPC consumption
possibilities is typically maximized by
producing where the PPC is tangent to the
consumption possibilities line.
 With a straight-line PPC production is
completely specialized.

Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 18
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
Production and Consumption
Possibilities and the Benefits of Trade
Economic Naturalist

Does “cheap” foreign labor pose a danger
to high-wage economies?
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 19
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
Production and Consumption
Possibilities and the Benefits of Trade
Economic Naturalist

Scenario
 U.S.
and Fredonia produce software and beef.
 Real wages in Fredonia are lower than in the
U.S.
 Fredonia is half as productive as the U.S. in
beef production.
 Fredonia is one-tenth as productive in software
production.
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 20
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
Production and Consumption
Possibilities and the Benefits of Trade
Economic Naturalist

Outcome
 Fredonia
has a comparative advantage in beef.
 U.S. has a comparative advantage in software.
 The U.S. will trade software for beef and
increase its consumption of both.
 Employment in the software industry in the U.S.
increases and employment in the beef industry
will decrease.
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 21
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The Market for
Computers in Costa Rica
Consumer surplus
without trade = $1mil/yr
Consumer surplus
with trade = $1.96mil/yr
Domestic
supply
2,400
Domestic
supply
2,400
E
Producer surplus
with trade = $360K/yr
E
1,400
1,400
Producer surplus
without trade = $1mil/yr
F
World
price
1,000
Computer Imports
400
400
Domestic
demand
2,000
Computer per year
Without Trade
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
4,800
Domestic
demand
1,200
Chapter 9: International Trade
2,000 2,800
Computer per year
With Trade
Slide 22
4,800
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
A Supply and Demand
Perspective on Trade
If the price of a good or service in a
closed economy is greater than the
world price, and that economy opens
itself to trade, the economy will tend to
become a net importer of that good or
service.
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 23
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The Market for
Coffee in Costa Rica
Consumer surplus
without trade = $250K/yr
Consumer surplus
with trade = $40K/yr
Domestic
supply
12
Domestic
supply
12
10
F
E
World
price
E
7
7
Producer surplus
with trade = $600K/yr
Producer surplus
without trade = $150K/yr
4
4
Coffee exports
Domestic
demand
100,000
Coffee (pounds/year)
Without Trade
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
240,000
Domestic
demand
40,000 100,000
200,000 240,000
Coffee (pounds/year)
With Trade
Chapter 9: International Trade
Slide 24
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
A Supply and Demand
Perspective on Trade
If the price of a good or service in a
closed economy is lower than the world
price, and that economy opens itself for
trade, the economy will tend to become
a net exporter of that good or service.
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 25
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
A Supply and Demand
Perspective on Trade
Observations of the Mutually Beneficial
Gains from Trade
Countries will profit by exporting the goods
and services for which they have a
comparative advantage.
 The revenue from the exports are used to
import goods and services for which they
do not have a comparative advantage.

Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 26
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
A Supply and Demand
Perspective on Trade
Observations of the Mutually Beneficial
Gains from Trade
The markets will ensure that goods will be
produced where opportunity cost is lowest.
 The consumption possibilities will be
maximized.

Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 27
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Exercise 9.4
Domestic
supply
Price of computers ($/computer)
2,400
Question
•Given the graph shown,
what impact would trade
have on producer and
consumer surplus?
2,100
World
price
1,200
600
Domestic
demand
200
500
800
1,200
Computers per year
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 28
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
A Supply and Demand
Perspective on Trade
Winners and Losers from Trade

Winners
 Consumers
of imported goods
 Producers of exported goods

Losers
 Consumers
of exported goods
 Producers of imported goods
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 29
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
Protectionism


The view that free trade is injurious and
should be restricted
Tariff


A Supply and Demand
Perspective on Trade
A tax imposed on an imported good
Quota

A legal limit on the quantity of a good that
may be imported
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 30
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The Market for Computers after
the Imposition of an Import Tariff
Domestic
supply
Price of computers ($/computer)
2,400
E
1,200
World price
+ tariff
1,000
World price
400
Imports
without
tariff
1,200 1,600
2,400 2,800
Domestic
demand
4,800
Computers per year
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 31
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The Market for Computers after
the Imposition of an Import Tariff
Price of computers ($/computer)
2,400
Consumer surplus
with tariff = 1.44K/yr
Domestic
supply
Tariff revenue =
$160K/yr
E
1,200
World price
+ tariff
1,000
World price
400
Producer surplus
with tariff = 640K/yr
Imports
with
tariff
1,200 1,600
2,400 2,800
Domestic
demand
4,800
Computers per year
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 32
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Exercise 9.5
Domestic
supply
Price of computers ($/computer)
3,600
Question
•Given the graph shown,
how will a tariff of $300
per computer affect total
economic surplus?
2,100
1,500
World
price
1,200
600
Domestic
demand
200 300 500
700 800
1,200
Computers per year
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 33
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
Protectionist Policies:
Tariffs and Quotas
What do you think?

Why did President George W. Bush support
the imposition of tariffs on steel imported into
the United States?
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 34
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
Protectionist Policies:
Tariffs and Quotas
Quotas
Legal limit on the number or value of foreign
goods that can be imported
 Can be enforced by issuing permits

Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 35
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The Market for Computers after
the Imposition of an Import Quota
Domestic supply
Price of computers ($/computer)
2,400
Domestic
supply + quota
E
1,400
F
1,200
Imports with free trade
= 1,600 computers/yr
World price
1,000
400
Domestic
demand
1,200 1,600
2,400 2,800
2,000
4,800
Computers per year
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 36
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The Market for Computers after
the Imposition of an Import Quota
Price of computers ($/computer)
2,400
Domestic supply
Consumer surplus
with quota = $1,440K/yr
Domestic
supply + quota
E
1,400
F
Economic rent to
holders of import
licenses = $80K/year
1,200
World price
1,000
Imports = 800
computers/year
400
Domestic
demand
Producer surplus
with quota = $640K/yr
1,200 1,600
2,400 2,800
2,000
4,800
Computers per year
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 37
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
A Supply and Demand
Perspective on Trade
Quotas & Tariffs
Market effects of tariffs are the same.
 Tariffs generate tax revenue.
 Quotas generate revenue for the firms that
hold an import license.

Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 38
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
A Supply and Demand
Perspective on Trade
Question

Why would the government ever impose a
quota rather than a tariff?
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 39
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
A Supply and Demand
Perspective on Trade
Economic Naturalist

Who benefited from and who was hurt by
voluntary export restraints on Japanese
automobiles in the 1980s?
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 40
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
A Supply and Demand
Perspective on Trade
Other Barriers to Trade
Red-tape barriers
 Regulations

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Chapter 9: International Trade
Slide 41
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
A Supply and Demand
Perspective on Trade
The Inefficiency of Protectionism
Trade barriers are inefficient and reduce the
size of the economic pie.
 Because trade barriers benefit certain
groups, and these groups may be well
organized, they may be successful in
lobbying for trade barriers.
 The gains from trade could be used to assist
groups that have been hurt by trade.

Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 42
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Outsourcing

Outsourcing

A term increasingly used to connote having
services performed by low-wage workers
overseas
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Chapter 9: International Trade
Slide 43
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Outsourcing

Outsourcing

Outsourcing of services to low-wage foreign
workers is exactly analogous to the
importation of goods manufactured by lowwage foreign workers.
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 44
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Outsourcing

Economic Naturalist
Paul Solman and his associate Lee
Koromvokis produce video segments that
provide in-depth analysis of current
economic issues for the PBS evening news
program, The NewsHour with Jim Lehrer.
 Is it likely that his job will someday be
outsourced to a low-wage reporter from
Hyderbad?

Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 45
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Outsourcing

Characteristics of Jobs that are Less
Susceptible to Outsourcing
Less rules-based jobs
 “Face-to-Face” complex communication jobs
 Jobs that require the worker to be physically
present

Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 46
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Outsourcing

Responding to changing economic
conditions requires the ability to adapt
quickly to new circumstances.

Education provides the means to develop
a comparative advantage that is not
rules-based and does require complex
face-to-face communication.
Copyright c 2007 by The McGraw-Hill
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Chapter 9: International Trade
Slide 47
End of
Chapter
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