Transcript Why Trade?
33 International Trade and Comparative Advantage No nation was ever ruined by trade. BENJAMIN FRANKLIN Contents ● Why Trade? ● International versus Intranational Trade ● The Law of Comparative Advantage ● Supply, Demand, and Pricing in World Trade ● Tariffs, Quotas, and Other Interferences with Trade Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Contents (continued) ● Why Inhibit Trade? ● Other Arguments for Protection ● Can Cheap Imports Hurt a Country? Copyright © 2003 South-Western/Thomson Learning. All rights reserved. 33-1 Labor Costs in Industrialized Countries TABLE Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Why Trade? ● Reasons countries benefit from foreign trade ♦ They can import resources they lack at home. ♦ They can import goods for which they are a relatively inefficient producer. ♦ Specialization sometimes permits economies of large-scale production. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. Why Trade? ● Mutual Gains from Trade ♦ When trade is voluntary: ■Both sides must expect to gain from it ■Otherwise, they would not trade Copyright© 2003 Southwestern/Thomson Learning All rights reserved. International versus Intranational Trade ● International and intranational trade are similar in many respects. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. International versus Intranational Trade ● Why international trade is studied separately: ♦ Countries are governed by separate governments ♦ International trade involves the exchange of national currencies ♦ Labor and capital are less mobile internationally than they typically are within a country Copyright© 2003 Southwestern/Thomson Learning All rights reserved. The Law of Comparative Advantage ● One country is said to have an absolute advantage over another in the production of a particular good if it can produce that good using smaller quantities of resources than can the other country. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. The Law of Comparative Advantage ● One country is said to have a comparative advantage over another in the production of a particular good if it produces that good less inefficiently than the other country. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. The Law of Comparative Advantage ● The law of comparative advantage applies even if one country is at an absolute disadvantage relative to another country in the production of every good. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. The Law of Comparative Advantage ● Both countries gain from trade even if one of them is more efficient than the other in producing everything. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. The Law of Comparative Advantage ● The Arithmetic of Comparative Advantage ♦ When countries differ in the relative efficiency with which they produce different goods: ■Both world output and the welfare of each country can be increased if: ● Each country specializes in producing the goods for which it has a relative advantage; ● And then trades with the other. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. 33-2 Alternative Outputs from One Year of Labor Input TABLE Copyright © 2003 South-Western/Thomson Learning. All rights reserved. 33-3 Example of the Gains from Trade TABLE Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Law of Comparative Advantage ● The Graphics of Comparative Advantage ♦ Production possibilities frontiers for two countries can show: ■Different opportunity costs ■The potential gains from trade Copyright© 2003 Southwestern/Thomson Learning All rights reserved. 33-1 Per-Capita PPFs for Two Countries FIGURE 60 U Television Sets (millions) 50 J 40 U.S. production possibilities frontier 30 Japanese production possibilities frontier 20 10 N 0 10 S 20 30 40 50 60 Computers (millions) Copyright © 2003 South-Western/Thomson Learning. All rights reserved. FIGURE 33-2 The Gains from Trade 90 90 80 80 70 70 60 50 J 40 Japanese consumption possibilities 30 Japanese production possibilities 20 10 Television Sets 100 Television Sets 100 A U.S. consumption possibilities 60 U 50 40 30 U.S. production possibilities 20 10 N 0 10 P 20 S 30 40 50 60 0 10 20 30 40 50 60 Computers Computers (a) Japan (b) United States Copyright © 2003 South-Western/Thomson Learning. All rights reserved. ? Comparative Advantage: “Cheap Foreign Labor” ● A country can benefit from trade, even if wages in the other country are considerably lower than its own wages. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. Supply, Demand, and Pricing in World Trade ● In a two-country supply-demand model without trade restrictions: ♦ The price of a good must be the same in both countries ♦ The quantity of a good exported from one country must equal the quantity imported by the other Copyright© 2003 Southwestern/Thomson Learning All rights reserved. 33-3 Supply-Demand in the International Wheat Trade Exporting country’s demand $3.25 2.50 Exporting country’s supply E F A B Exports Price of Wheat per Bushel Price of Wheat per Bushel FIGURE G H C D Imports Importing country’s supply 0 Quantity of Wheat (a) Exporting Country 0 Importing country’s demand Quantity of Wheat (b) Importing Country Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Tariffs, Quotas, and Other Interferences with Trade ● Countries can reduce imports by setting tariffs or quotas. ● They can promote exports by subsidizing export goods. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. Tariffs, Quotas, and Other Interferences with Trade ● Tariff = tax on imports ● Quota = legal limit on the amount of a good that may be imported ● Export subsidy = government payment to an exporter Copyright© 2003 Southwestern/Thomson Learning All rights reserved. Tariffs, Quotas, and Other Interferences with Trade ● How Tariffs and Quotas Work ♦ Both tariffs and quotas ■ price of imports ■ quantity of imports ♦ Any restriction of imports that is accomplished by a quota normally can also be accomplished by a tariff Copyright© 2003 Southwestern/Thomson Learning All rights reserved. 33-4 Quotas and Tariffs in International Trade Exporting country’s supply Exporting $2.50 A B S 2.00 80 85 115 125 Price of Wheat per Bushel Price of Wheat per Bushel FIGURE Importing country’s demand Importing country’s supply Q T $3.25 2.50 0 C D 50 57.5 87.5 95 Quantity of Wheat (b) Importing Country c o u n t r y ’ s Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Tariffs, Quotas, and Other Interferences with Trade ● Tariffs versus Quotas ♦ When imports are to be reduced, tariffs are generally preferable to quotas because: ■Tariffs generate income for the government ■Unlike quotas, tariffs offer no special benefits to inefficient exporters Copyright© 2003 Southwestern/Thomson Learning All rights reserved. Why Inhibit Trade? ● Reasons why countries may restrict trade: ♦ Gain a price advantage ♦ Protect particular industries ♦ National defense and other non-economic reasons ♦ Infant-industry argument ♦ Strategic trade policy Copyright© 2003 Southwestern/Thomson Learning All rights reserved. Why Inhibit Trade? ● But retaliation may eliminate their advantage and make all countries worse off. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. 33-4 Estimated Costs of Protectionism to Consumers TABLE Copyright © 2003 South-Western/Thomson Learning. All rights reserved. How Popular Is Protectionism? Protectionists Free traders 56% Percentage 47% 42% 37% World United States Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Can Cheap Imports Hurt a Country? ● Dumping = selling goods in a foreign market at lower prices than those charged in the home market ● Cheap imports: ♦ Benefit consumers ♦ Hurt some domestic businesses and their workers Copyright© 2003 Southwestern/Thomson Learning All rights reserved. Can Cheap Imports Hurt a Country? ● Those who are hurt by cheap imports may fight to prevent their losses. ● Politics often leads to the adoption of protectionist measures that would be rejected on strictly economic terms. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. ? A Last Look at the “Cheap Foreign Labor” Argument ● Labor is cheap in countries where productivity is low. ● Labor is expensive in countries like the United States where labor productivity is high. Copyright© 2003 Southwestern/Thomson Learning All rights reserved. ? A Last Look at the “Cheap Foreign Labor” Argument ● Under most circumstances, international trade enhances our standard of living. Copyright© 2003 Southwestern/Thomson Learning All rights reserved.