Transcript Chapter 1 - The Citadel

Chapter 33
Comparative
Advantage
and the Open
Economy
Introduction
When representatives from around the
world meet to discuss trade policies, it is
clear that those who desire open borders
often must change their own domestic
policies in order to encourage other
nations to let go of trade restrictions.
Slide 33-2
Learning Objectives
 Discuss the worldwide importance
of international trade
 Explain why nations can gain
from specializing in production
and engaging in international trade
 Distinguish between comparative
advantage and absolute advantage
Slide 33-3
Learning Objectives
 Understand common arguments
against free trade
 Describe ways that nations restrict
foreign trade
 Identify key international agreements
and organizations that adjudicate trade
disputes among nations
Slide 33-4
Chapter Outline
 The Worldwide Importance of
International Trade
 Why We Trade: Comparative
Advantage and Mutual Gains from
Exchange
 The Relationship Between Imports and
Exports
Slide 33-5
Chapter Outline
 International Competitiveness
 Arguments Against Free Trade
 Ways to Restrict Foreign Trade
Slide 33-6
Did You Know That...
 Toys and many household items sold
in the U.S. are increasingly
manufactured overseas?
 As each country specializes in
producing certain goods, all countries
can benefit?
Slide 33-7
The Worldwide Importance
of International Trade
 World GDP is nearly eight times
greater than it was at the end of World
War II.
 World trade has increased to more
than 24 times what it was in 1950.
Slide 33-8
The Worldwide Importance
of International Trade
 Since 1950, international trade has
become more important to the
economy of the United States.
– Wheras imports added up to barely 4
percent of annual national income in
1950, today they account for over 14
percent.
Slide 33-9
The Growth of World Trade
Figure 33-1, Panel (a)
Source: Steven Husted and Michael Melvin, International Economics, 3rd ed.
(New York: HarperCollins, 1995), p. 11, used with permission; World Trade
Organization; Federal Reserve System; U.S. Department of Commerce.
Slide 33-10
The Growth of World Trade
Figure 33-1, Panel (b)
Source: Steven Husted and Michael Melvin, International Economics, 3rd ed.
(New York: HarperCollins, 1995), p. 11, used with permission; World Trade
Organization; Federal Reserve System; U.S. Department of Commerce.
Slide 33-11
World Trade Flows
Figure 33-2
Slide 33-12
Why We Trade: Comparative Advantage
and Exhausting Mutual Gains From Exchange
 Scenario (8-hour day)
– Ad specialist
• 2 pages of ad copy/hour
• 1 art rendering/hour
– Computer artist
• 1 page of ad copy/hour
• 1 art rendering/hour
Slide 33-13
Why We Trade: Comparative Advantage
and Exhausting Mutual Gains From Exchange
Without Trade
(8-hour day)
Ad Specialist
Computer Artist
Total
Copy
4 hrs x 2 = 8
4 hrs x 1 = 4
12
Renderings
4 hrs x 1 = 4
4 hrs x 1 = 4
8
Slide 33-14
Why We Trade: Comparative Advantage
and Exhausting Mutual Gains From Exchange
With Trade
(8-hour day)
Ad Specialist
Copy
Renderings
Computer Artist
8 hrs x 2 = 16
Total
16
8 hrs x 1 = 8
8
Ad copy output
increases by 4
pages per day
Slide 33-15
Why We Trade: Comparative Advantage
and Exhausting Mutual Gains From Exchange
 Comparative Advantage
– The ability to produce a good or service at
a lower opportunity cost compared with
producers
Slide 33-16
Why We Trade: Comparative Advantage
and Exhausting Mutual Gains From Exchange
 Absolute Advantage
– The ability to produce more output from
given inputs or resources than other
producers can
Slide 33-17
International Example: Power Moves
Across Borders in South America
 Most nations of South America generate
their electric power by burning natural gas.
 The cost of extracting and using natural gas
is lower in Brazil than it is in neighboring
Argentina or Uruguay.
 Consequently, these countries import
electric power from Brazil.
Slide 33-18
Why We Trade: Comparative Advantage
and Exhausting Mutual Gains From Exchange
 Specialization among nations
– Scenario
• Two countries—India & United States
• Two commodities—software programs and
computers
• One factor of production—labor
• Workforce in each country—200
Slide 33-19
Comparative Costs of Production
Product
United States (worker-days)
India (worker-days)
Software programs
1
1
Computers
1
2
Slide 33-20
Comparative Costs of Production
Daily World Output Without
Specialization or Trade
India
United States
Product
Workers
Output
Workers
Output
World Output
Software programs 100
100
100
100
200
Computers
100
100
50
150
100
Slide 33-21
Comparative Costs of Production
Daily World Output With
Specialization and Trade
India
United States
Product
Workers
Software programs ——
Computers
200
Output
Workers
Output
World Output
——
200
200
200
200
———
———
200
Computer output
increases by
50 per day
Slide 33-22
Why We Trade: Comparative Advantage
and Exhausting Mutual Gains From Exchange
 Observations on specialization and
trade
– Increase output without using more
resources
– Importing is a way of producing a good at
a lower cost
Slide 33-23
Why We Trade: Comparative Advantage
and Exhausting Mutual Gains From Exchange
 Observations on specialization and
trade
– Not everyone gains from trade
– Cannot “run out of exports”
– Every country will always have a
comparative advantage in something
Slide 33-24
International Example: Mauritius
Searches for a Comparative Advantage
 Mauritius, an island nation in the Indian
Ocean, once had a comparative advantage
in the production of sugarcane.
 From the 1970’s to the 1990’s, much of the
labor force of the island was employed in
textile production.
 Now that textile work has largely relocated to
China and India, Mauritius is again looking
for an industry in which its workers can offer
a comparative advantage.
Slide 33-25
Why We Trade: Comparative Advantage
and Exhausting Mutual Gains From Exchange
 Other benefits from international trade:
the transmission of ideas
– The transmission of new goods and
services
– Intellectual property
– New processes or techniques of
production
Slide 33-26
The Relationship
Between Exports and Imports
 In the long run, imports are paid for by
exports.
 Any restrictions on imports ultimately reduce
exports.
 When a country engages in trade, it is not
competing against the other countries.
 All nations stand to benefit from trade.
Slide 33-27
International Competitiveness
 Is the U.S. competitive?
– Ranks #1 in the world in overall
productive efficiency
• According to the Institute for Management
Development in Lausanne, Switzerland
Slide 33-28
International Competitiveness
 Reasons for ranking
– Rapid economic growth since 1990–91
– Widespread entrepreneurship
– Economic restructuring
– Sophisticated financial system
– Large investments in scientific research
Slide 33-29
Example: U.S. Service Exports
Gain on Merchandise Exports
 As a fraction of total U.S. exports,
services are becoming more
predominant.
 This shows that the opportunity cost of
producing services is relatively low in
the U.S. compared to other nations.
Slide 33-30
Arguments Against Free Trade
 Infant Industry Argument
– The contention that tariffs should be
imposed to protect from import
competition an industry that is trying to get
started
– Presumably, after the industry becomes
technologically efficient, the tariff can be
lifted.
Slide 33-31
Arguments Against Free Trade
 Countering foreign subsidies
 Countering Dumping
– Selling a good or a service abroad at a
price below its cost of production or below
the price charged in the home market
Slide 33-32
Arguments Against Free Trade
 Protecting domestic jobs
– Do imports reduce jobs?
• No empirical evidence
• In half of the cases studied, when imports
rose, unemployment fell
Slide 33-33
Arguments Against Free Trade
 The cost of protecting U.S. jobs
– Restrictions on textiles and apparel goods
cost U.S. consumers $9 billion/year
• Cost $50,000 for each $20,000 job saved
– Restriction on Japanese cars
• Cost $160,000/year for each job saved
Slide 33-34
Arguments Against Free Trade
 The cost of protecting U.S. jobs
– Glass industry restrictions
• Cost $200,000/year per job saved
– Steel industry restrictions
• Cost $750,000/year per job saved
Slide 33-35
Emerging Arguments
Against Free Trade
 Environmental concerns
– Genetic engineering and accidental
production of new diseases
 National defense
Slide 33-36
Ways to Restrict Foreign Trade
 Quota System
– A government-imposed restriction on the
quantity of a specific good that another
country is allowed to sell in the United
States
Slide 33-37
Ways to Restrict Foreign Trade
 Voluntary quotas
– Voluntary Restraint Agreement (VRA)
• An official agreement with another country that
“voluntarily” restricts the quantity of its exports
– Voluntary Import Expansion (VIE)
• An official agreement with another country in
which it agrees to import more from the United
States
Slide 33-38
The Effects of Quotas
on Textile Imports
Price per Yard of Imported Textiles ($)
Supply with
import quotas
S
Equilibrium
without
restrictions
E1
1.00
D
0
Figure 33-4
E2
1.50
800
900
Quantity of Textiles Imported per Year
(millions of yards)
Slide 33-39
Ways to Restrict Foreign Trade
 Tariffs
– Tax on imported goods
 An import tariff benefits importcompeting industries and harms
consumers by raising prices.
Slide 33-40
The Effect of a Tariff on
Japanese-Made Laptop Computers
Panel (a)
S2
$500
tariff
Price per Laptop ($)
S1
Japanese-Made
Laptops
E2
1,250
1,000
E1
D
0
8
10
Japanese-Made Laptops (millions)
Figure 33-5, Panel (a)
Slide 33-41
The Effect of a Tariff on
Japanese-Made Laptop Computers
Panel (b)
Price per Laptop ($)
S
American-Made
Laptops
E2
1,250
1,000
E1
D2
D1
0
5.0
6.5
U.S.-Made Laptops (millions)
Figure 33-5, Panel (b)
Slide 33-42
Tariff Rates in the
United States Since 1820
Figure 33-6
Source: U.S. Department of Commerce
Slide 33-43
Ways to Restrict Foreign Trade
 Current tariff laws
– Trade Expansion Act of 1962
– Trade Reform Act of 1974
– Trade and Tariff Act of 1984
– General Agreement on Tariffs and Trade
(GATT) of 1947
Slide 33-44
Ways to Restrict Foreign Trade
 The World Trade Organization (WTO)
– Uruguay Round
– Replaced GATT in the role of negotiating
trade disputes
– 147 member nations
Slide 33-45
Ways to Restrict Foreign Trade
 Regional trade blocs
– Groups of countries who grant trade
preferences amongst themselves
– Examples
• European Union
• NAFTA
Slide 33-46
Issues and Applications:
Agricultural Subsidies Derail the WTO
 Within the WTO, there is concern
about the effect of agricultural
subsidies paid by the developed
nations to their farmers.
 These subsidies have the effect of
allowing food items exported from
developed countries to serve as stiff
competition for similar items produced
elsewhere in the world.
Slide 33-47
Summary Discussion
of Learning Objectives
 Worldwide importance of international trade
– World trade had grown faster than total world
GDP
 Why nations can gain from specialization in
production and engaging in trade
– Comparative advantage
Slide 33-48
Summary Discussion
of Learning Objectives
 Comparative advantage versus
absolute advantage
– Comparative advantage
• Production by one nation at a lower
opportunity cost than another
– Absolute advantage
• A nation can produce more with a given set of
resources than can another
Slide 33-49
Summary Discussion
of Learning Objectives
 Arguments against free trade
– Infant industry
– Dumping
– Environmental concerns
– National defense
 Ways that nations restrict foreign trade
– Tariffs
– Quotas
Slide 33-50
Summary Discussion
of Learning Objectives
 Key international agreements and
organizations that adjudicate trade
disputes
– GATT
– WTO
Slide 33-51
End of
Chapter 33
Comparative
Advantage
and the Open
Economy