Transcript International Trade

International Trade
U.S. 2002 Trade Information
exports:
1.0 trillion dollars
9.7 % of GDP
imports:
1.4 trillion dollars
13.7 % of GDP
Source:
http://devdata.worldbank.org/external/CPProfile.asp?SelectedCountry=US
A&CCODE=USA&CNAME=United+States&PTYPE=CP
When a country does not trade:
production possibilities = consumption possibilities.
This is not true when the country trades.
Example:
Production Possibilities for the U.S. & Japan
Food and Computers
Production Possibilities for the U.S.
food
computers
0
30
20
20
40
10
60
0
10 C cost 20 F
or 1C costs 2 F
Production Possibilities for the U.S.
food
computers
0
30
20
20
40
10
60
0
10 C cost 20 F
or 1C costs 2 F
computers
food
Production Possibilities for the U.S.
food
computers
0
30
20
20
40
10
60
0
10 C cost 20 F
or 1C costs 2 F
computers
60
45
30
15
0
15
30
45
60 food
Production Possibilities for the U.S.
food
computers
0
30
20
20
40
10
60
0
10 C cost 20 F
or 1C costs 2 F
computers
60
45
30
15
0
15
30
45
60 food
Production Possibilities for Japan
food
computers
0
45
10
30
20
15
30
0
15 C cost 10 F
or 1 C costs 2/3 F
Production Possibilities for Japan
food
computers
0
45
10
30
20
15
30
0
15 C cost 10 F
or 1 C costs 2/3 F
computers
food
Production Possibilities for Japan
food
computers
0
45
10
30
20
15
30
0
15 C cost 10 F
or 1 C costs 2/3 F
computers
60
45
30
15
0
15
30
45
60 food
Production Possibilities for Japan
food
computers
0
45
10
30
20
15
30
0
15 C cost 10 F
or 1 C costs 2/3 F
computers
60
45
30
15
0
15
30
45
60 food
Trade Arrangement
Since 1 C costs 2 F in the U.S.,
and 1 C costs 2/3 F in Japan,
1 C will trade for between 2/3 F
and 2 F.
Suppose they agree to
trade 1C for 1 F.
Consumption Possibilities for the U.S.
The consumption
possibilities are
now greater than
the production
possibilities.
computers
60
45
30
consumption
15
production
0
15
30
45
60 food
Consumption Possibilities for Japan
Again, the
consumption
possibilities are
greater than the
production
possibilities.
computers
60
45
30
consumption
15
production
0
15
30
45
60 food
Natural Barriers to Trade



contracting costs
negotiating costs
transportation costs
Artificial Barriers to Trade
 tariff:
 quota:
a tax on imported goods
a limit on the quantity of a good
that is imported
Free Trade
exchange of goods between countries without
artificial barriers.
Benefits of Free Trade
Consumer Surplus
difference between the price paid and the
amount the consumer is willing to pay.
P
the area under the
demand curve and
above the price
P*
D
Q
Producer Surplus
difference between the amount the producer
must receive to be willing to provide the good
and the price paid.
P
S
the area under the
price and above
the supply curve
P*
Q
Domestic Demand Curve (DD ):
Demand for Cars by U.S. Consumers
price
A
DD
quantity
Domestic Supply Curve (SD ): Supply of Cars
to U.S. Consumers by U.S. Producers
price
SD
A
D
DD
quantity
Without trade: price is OB and quantity is OI.
price A
B
SD
E
DD
D
O
I
quantity
Without trade: consumer surplus is area ABE ...
price
SD
A
B
E
DD
D
O
I
quantity
... and producer surplus is area DBE.
price
SD
A
B
E
DD
D
O
I
quantity
Total Supply Curve (ST ): Supply of Cars to
U.S. Consumers by All Producers
price
A
SD
B
E
DD
D
O
ST
I
quantity
With trade: price is OC and quantity
purchased by U.S. consumers is OJ.
price
A
B
C
SD
E
G
DD
D
O
ST
I J
quantity
The quantity sold by U.S. producers is OH
and the quantity of imports is HJ.
price
A
SD
B
C
E
F
G
DD
D
O
ST
H I J
quantity
With trade: Consumer Surplus is area ACG
price
A
B
C
SD
E
F
G
DD
D
O
ST
H I J
quantity
Recall: Without trade, consumer surplus was
area ABE.
Consumers
price
have
gained
A
SD
area CBEG
E
from trade.
B
ST
C
F
G
DD
D
O
H I J
quantity
Suppose we are viewing this issue from the
perspective of the U.S. government.
Our concern is the welfare of U.S. consumers
and U.S. producers (not foreign producers).
Domestic producer surplus is the area above
the domestic supply curve and below the
price.
With trade: (Domestic) Producer Surplus is
area CDF
price
A
SD
B
C
E
F
G
DD
D
O
ST
H I J
quantity
Recall: Without trade, producer surplus was
area DBE.
Producers have
price
lost
area
CBEF
A
SD
from trade.
E
B
ST
C
F
G
DD
D
O
H I J
quantity
So consumers have gained area CBEG and ...
price
A
B
C
SD
E
F
G
DD
D
O
ST
H I J
quantity
... producers have lost area CBEF.
price
A
B
C
SD
E
F
G
DD
D
O
ST
H I J
quantity
So for U.S. citizens, there is a net gain
from trade of area EFG.
price
A
SD
B
C
E
F
G
DD
D
O
ST
H I J
quantity
Putting it all together:
Relative to the no-trade situation,
when there is free trade,
 the
price paid by U.S. consumers is lower.
 the quantity purchased by U.S. consumers is
higher.
 there is a gain in consumer surplus.
 there is a loss of producer surplus.
 there is a net gain to U.S. citizens.
How do tariffs & quotas affect U.S. citizens?
Relative to the free trade situation,
 the price paid by U.S. consumers is higher.
 the quantity purchased by U.S. consumers is
lower.
 there is a loss of consumer surplus.
 there is a gain in producer surplus.