Transcript Trade Policy

Chapter 18: Trade Policy
This chapter covers Trade Policy
-- measures to alter International
Trade: exports (X), imports (M),
and net exports, or the Balance of
Trade (X-M).
To some extent, trade policy is
used to stabilize the economy
(changes in net exports shift the
AD curve).
Why Do Countries Trade?
More conceptual issue -- using
trade to make world resources be
allocated more efficiently.
People of different countries trade
because they both stand to benefit
from the deal.
Absolute Advantage
Absolute Advantage -- each
country has an advantage in
producing one good. Therefore,
they produce a surplus of the
advantaged good, and trade for the
“other good”.
Intuitive but overly restrictive.
The Theorem of
Comparative Advantage
Theorem of Comparative
Advantage -- Consider the different
economies of two nations. Then
there exists an efficient trade
agreement that will benefit both
nations. This holds even if one
nation has an absolute advantage
in all goods.
The Production
Possibility Curve
The Production Possibility Curve - a graph of possible outputs of
two different goods for a country
given fixed inputs which are used
efficiently.
Common example -- military
goods (“guns”) versus nonmilitary goods (“butter”).
The Production Possibility
Curve, Economic Situations
Points on the curve -- efficient use
of resources. Different points
reflect emphases toward military
or non-military goods.
Points inside the curve -inefficient use of resources.
Points outside the curve -unattainable production points
given current resources.
Ways to Attain
“Unattainable Points”
Shift production possibility curve
outward -- more resources, higher
labor productivity.
Trade with other countries -increases consumption
possibilities without changing
production possibilities.
Comparative Advantage at work.
Comparative Advantage -Promote Free Trade
Implication of Theorem of
Comparative Advantage -- promote
Free Trade, international trade with
as few barriers to trade as
possible.
“Free market” will find efficient
trade agreement which will benefit
both countries.
Barriers to Trade -- Quotas
Quota -- limiting the total quantity
of a good that can be imported
over a period of time.
Portrayed as vertical line within
supply curve for the imported
good.
Increases equilibrium price level
(P*), decreases equilibrium
quantity (Q*).
Properties of Quotas
Limits imports to predetermined
quantity.
Policymakers can control exactly
how much is imported.
Still, it limits free trade -- potential
benefits to both countries
(Comparative Advantage).
Barriers to Trade -- Tariffs
Tariff (or Duty) -- tax imposed by
the government on an imported
good.
Shifts the supply curve for the
imported good leftward, increasing
equilibrium price (P*) and
decreasing equilibrium quantity
(Q*).
Properties of Tariffs
Reduces quantity imported.
Degree of reduction depends upon
steepness of demand curve.
Source of tax revenue.
Still, it limits free trade -- potential
benefits to both countries
(Comparative Advantage).
Also can lead to retaliation.
Dumping and
Counterveiling Duties
Dumping -- when a country sells a
good abroad at an artificially low
price, subsidized by the
government.
Counterveiling Duty -- a tariff
imposed to offset the artificially
low price.
The Worldwide Trend
Toward Free Trade
General Agreement on Tariffs and
Trade (GATT) -- negotiations on
trade agreements between nations,
toward dropping barriers to trade.
World Trade Organization (WTO) -evolution of GATT, on a much
broader worldwide scale.
Free Trade Agreements
North American Free Trade
Agreement (NAFTA) -- US, Canada,
and Mexico, 1994.
Central American Free Trade
Agreement (CAFTA) – US and Latin
American countries, 2005.
More Free Trade
Agreements
European Union -- economic
bonding of major European
nations, including a common
currency (the Euro).
Free Trade Agreement of the
Americas – all of North and South
America (proposed).
Should the World
Work Toward Free Trade?
Having a level playing field.
Benefiting the majority versus
significantly hurting a vocal
minority.
Painful transitions versus long-run
benefits.
Will improving economies fix
social problems in developing
nations (e.g. China)?