Transcript Chapter 14 - McGraw

Chapter 13
International Trade:
Does It Jeopardize
American Jobs?
Issues In Economics Today, 4e
Guell
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
• WHAT WE TRADE AND WITH
WHOM
• THE BENEFITS FROM TRADE
• BARRIERS TO TRADE
• TRADE AS A DIPLOMATIC
WEAPON
13-2
You Are Here
13-3
Exports and Imports
As a percentage of GDP
15.0%
10.0%
5.0%
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
0.0%
Period
Percent of GDP
20.0%
Year
Exports/GDP
Imports/GDP
13-4
What We Trade: Exports (2006)
Good
Industrial Eq
Elec. Mach. Aud &
Video
Motor Vehicles
Aerospace
Optics
Services
Billions of Dollars of
Exports
182.0
145.8
92.7
66.8
61.9
400.7
13-5
What We Trade: Imports (2006)
Good
Petroleum
Industrial Eq
Elec. Mach. Aud &
Video
Motor Vehicles
Optics
Services
Total
Billions of Dollars
of Imports
333.6
249.1
229.2
215.4
505.1
346.4
2201.4
13-6
With Whom We Trade
50
Trade Balance ($billions)
0
-50
-100
-150
-200
-250
1985
1990
1995
2000
2004
2006
Year
Canada
Mexico
Japan
China
Middle East
European Union
Africa
13-7
Comparative and Absolute
Advantage
• Absolute Advantage: the ability to
produce a good better, faster, or
more quickly than a competitor
• Comparative Advantage: the ability
to produce a good at a lower
opportunity cost of the resources
used
13-8
The Benefits of Trade: When Comparative
and Absolute Advantage are the same
Suppose there are two countries, the United States and
Brazil, and two goods, Apples and Coffee, and the
production per unit of labor is shown in the table below.
Coffee
United States 1
Brazil
2
Apples
2
1
Clearly, there are benefits from trade. If the Americans focus
on apples and the Brazilians focus on coffee and they trade
with one another, more apples and more coffee is available to
both countries.
13-9
The Benefits of Trade: When Comparative
and Absolute Advantage are Not the same
Now suppose the Americans are better at producing both
goods. The Americans have an absolute advantage in both
but a comparative advantage in only Apples.
Coffee
United States 3
Brazil
2
Apples
2
1
There are still benefits from trade. If the Americans focus on
apple production and the Brazilians focus on coffee production
and they trade with one another more apples and coffee is
available to both countries.
13-10
Terms-of-trade
• The amount of a good one country
must give up in order to obtain
another good from the other country,
usually expressed as a ratio.
13-11
Using Production Possibilities
Frontiers
Brazil
United States
Apples
Apples
Production
Possibilities Frontier
Production Possibilities Frontier
Coffee
Coffee
13-12
Consumption Possibilities Frontier with
Trade
Apples
Consumption Possibilities Frontier
Coffee
13-13
Reasons For Limiting Trade That Many
Economists Support
• National Security
• National Identity
– Both of the above can be overstated
easily.
• Environmental Concerns
• Child-Labor Concerns
13-14
Reasons for Limiting Trade that Most
Economists Do Not Support
• To protect industries from
competition
– To temporarily aid an industry that is
just emerging.
– To protect an industry from competition
that is dumping (the exporting of goods
below cost so as to drive competitors
out-of-business) its products in the US.
13-15
Methods of Limiting Trade
• Tariffs: a tax on imports
• Quotas: a legal restriction on the
amount of a good coming into the
country
• Non-tariff barriers: barriers to trade
that result from regulatory actions
13-16
Cost of Limiting Trade
Domestic Market
P
World Market
S
P
A
S
Pdomestic
Pworld
C
F
E
B
Q’s Qd Q’d
Pworld
D
D
Q/t
Q/t
13-17
Tariffs vs. Quotas
P
S’
Plimit
P*
C
A
F
}
Tariff
B
E
S
Limiting trade with a quota
Limiting trade with a tariff
A tariff raises tax revenue and
a quota does not.
D
Qlimit Q*
Q/t
13-18
Costs of Protection
• Whether there is a quota or a tariff
there is deadweight loss. This means
that the gainers (the people who
keep their jobs) gain less than the
losers (the people who have to pay
higher prices) lose.
• The average cost per job saved via
trade barriers is estimated to be
$169,000 per year.
13-19
Trade as a Diplomatic Weapon
• Trade sanctions have failed
– To get Castro out of Cuba
– To get Iran to release our hostages in
1979-1980.
– To get the Soviet Union out of
Afghanistan.
– To get Iraq out of Kuwait in 1990.
13-20