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chapter: 5 >> International Trade Krugman/Wells ©2009 Worth Publishers Goods and services purchased from other countries are imports; goods and services sold to other countries are exports. Globalization is the phenomenon of growing economic linkages among countries. The Ricardian model of international trade analyzes international trade under the assumption that opportunity costs are constant. Autarky is a situation in which a country cannot trade with other countries. (a) U.S. Production Possibility Frontier Quantity of computers (b) Vietnamese Production Possibility Frontier Quantity of computers 2,000 1,000 U.S. production and consumption in autarky C US Vietnamese production and consumption in autarky 1,000 Slope = –2 500 C V PPF 0 500 US 1,000 Quantity of shrimp (tons) Slope = –0.5 PPF 0 1,000 V 2,000 Quantity of shrimp (tons) The Ricardian model of international trade shows that trade between two countries makes both countries better off than they would be in autarky—that is, there are gains from trade. (a) United States Quantity of shrimp (tons) Quantity of computers (b) Vietnam Quantity of shrimp (tons) Quantity of computers Production 500 1,000 Production 1,000 500 Consumption 500 1,000 Consumption 1,000 500 (c) World (United States and Vietnam) Quantity of shrimp (tons) Quantity of computers Production 1,500 1,500 Consumption 1,500 1,500 (a) United States Quantity of shrimp (tons) Quantity of computers (b) Vietnam Quantity of shrimp (tons) Quantity of computers Production 0 2,000 Production 2,000 0 Consumption 750 1,250 Consumption 1,250 750 (c) World (United States and Vietnam) Quantity of shrimp (tons) Quantity of computers Production 2,000 2,000 Consumption 2,000 2,000 (a) U.S. Production and Consumption Quantity of computers Q 2,000 US U.S. production with trade C’ US 1,250 1,000 (b) Vietnamese Production and Consumption Quantity of computers Vietnamese production and consumption in autarky U.S. consumption with trade C US U.S. production and consumption in autarky Vietnamese consumption with trade 1,000 750 500 PPF V CV C’ VVietnamese production with trade QV PPFUS 0 500 750 1,000 Quantity of shrimps (tons) 0 1,000 1,250 2,000 Quantity of shrimps (tons) The main sources of comparative advantage are: International differences in climate Differences Factor in technology endowments • Availability of resources in each country. According to the Heckscher-Ohlin model, a country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country. A key concept in the model is factor intensity. The factor intensity of production of a good is a measure of which factor is used in relatively greater quantities than other factors in production. Oil refining is capital-intensive compared to clothing manufacture, because oil refiners use a higher ratio of capital to labor than clothing producers. Pauper Labor Fallacy & Sweatshop Labor Fallacy The Effects of Imports The domestic demand curve shows how the quantity of a good demanded by domestic consumers depends on the price of that good. The domestic supply curve shows how the quantity of a good supplied by domestic producers depends on the price of that good. The world price of a good is the price at which that good can be bought or sold abroad. Price of shrimp Domestic supply Consumer surplus P A A Producer surplus Domestic demand Q A Quantity of Shrimp Consumer Surplus = Willingness to Pay – Price Paid Producer Surplus = Price Received – Cost of Production If the world price is higher than the autarky price, trade leads to exports and a rise in the domestic price compared to the world price. There are overall gains from trade because producer gains exceed the consumer losses. The graph that follows shows the domestic market with exports. Price of computer Domestic supply World price P W A P A Autarky price Domestic demand Domestic quantity demanded with trade Q D Q A Exports Q S Domestic quantity supplied with trade Quantity of computers Price of shrimp Domestic supply Price with tariff P T Tariff P W Domestic demand World price Q S Q ST Q DT Imports after tariff Imports before tariff Q D Quantity of Shrimp Changes in surplus Price of shrimp Gain Domestic supply A Tariff C B A Government revenue C Domestic demand QS Imports after tariff Producer surplus D PW QST QDT Imports before tariff QD –( A+B + C + D) Consumer surplus Change in total surplus PT Quantity of Shrimp Loss –( B + D)