Transcript Document

A Lecture Presentation
in PowerPoint
to accompany
Exploring Economics
Second Edition
by Robert L. Sexton
Copyright © 2002 Thomson Learning, Inc.
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Printed in the United States of America
ISBN 0030342333
Copyright © 2002 by Thomson Learning, Inc.
Chapter 26
International Trade
Copyright © 2002 by Thomson Learning, Inc.
26.1 The Growth in World Trade


In a typical year, about 15 percent of the
world's output is traded in international
markets.
While the importance of the
international sector varies enormously
from place to place, the volume of
international trade has increased
substantially.
Copyright © 2002 by Thomson Learning, Inc.
Major U.S. Trading Partners
Top Five Trading Partners
Exports of Goods in 1998
Rank
1
2
3
4
5
Country
Percent of Total
Canada
Mexico
Japan
United Kingdom
Germany
SOURCE: CIA, The World Factbook 2000.
Copyright © 2002 by Thomson Learning, Inc.
23
12
8
6
4
Top Five Trading Partners
Imports of Goods in 1998
Rank
1
2
3
4
5
Country
Canada
Japan
Mexico
China
Germany
SOURCE: CIA, The World Factbook 2000.
Percent of Total
19
13
10
8
5
26.2 Comparative Advantage and
Gains from Trade



The very existence of trade suggests
that trade is economically beneficial.
Because almost all trade is voluntary, it
would seem that trade occurs because
the participants feel that they are better
off because of the trade.
Both participants of an exchange of
goods and services anticipate an
improvement in their economic welfare.
Copyright © 2002 by Thomson Learning, Inc.
26.2 Comparative Advantage and
Gains from Trade

The classical economist David
Ricardo's theory that explains how trade
can be beneficial to both parties centers
on the concept of comparative
advantage.


A person, a region, or a country can gain
from trade if it produces a good or service
at a lower opportunity cost than others.
An area should specialize in producing and
selling those items in which it has a
comparative advantage.
Copyright © 2002 by Thomson Learning, Inc.
26.2 Comparative Advantage and
Gains from Trade

What is important for mutually beneficial
specialization and trade is comparative
advantage, not absolute advantage.
Copyright © 2002 by Thomson Learning, Inc.
26.2 Comparative Advantage and
Gains from Trade


The gains from comparative
advantage—specialization in what one
is a lower opportunity cost producer
of—can be illustrated with a production
possibility curve.
The differences in opportunity costs
provide an incentive to gain from
specialization and trade.
Copyright © 2002 by Thomson Learning, Inc.
Specialization and Trade
B
Food (pounds)
30
Total
production with
specialization
Wendy’s
PPC
C
15
10
7.5
Calvin’s
PPC
A
7.5 10 15
Cloth (yards)
Copyright © 2002 by Thomson Learning, Inc.
30
26.3 Supply and Demand in
International Trade

Consumer surplus


difference between the most a consumer
would be willing and able to pay for a
quantity of a good and what a consumer
actually has to pay
Producer surplus

difference between the least a supplier is
willing and able to supply a quantity of a
good or service for and the revenues a
supplier actually receives for selling it
Copyright © 2002 by Thomson Learning, Inc.
26.3 Supply and Demand in
International Trade

With the tools of consumer and
producer surplus, we can better analyze
the impact of trade.
Copyright © 2002 by Thomson Learning, Inc.
26.3 Supply and Demand in
International Trade

The demand curve represents a
collection of maximum prices that
consumers are willing and able to pay
for different quantities of a good or
service while the supply curve
represents a collection of minimum
prices that suppliers require to be willing
to supply different quantities of that
good or service.
Copyright © 2002 by Thomson Learning, Inc.
26.3 Supply and Demand in
International Trade


Trading at the market equilibrium price
generates both consumer surplus and
producer surplus.
Once the equilibrium output is reached
at the equilibrium price, all of the
mutually beneficial opportunities from
trade between suppliers and demanders
will have taken place; the sum of
consumer surplus and producer surplus
is maximized.
Copyright © 2002 by Thomson Learning, Inc.
26.3 Supply and Demand in
International Trade


The total gains to the economy from
trade is the sum of consumer and
producer surplus.
That is, consumers benefit from
additional amounts of consumer surplus
and producers benefit from additional
amounts of producer surplus.
Copyright © 2002 by Thomson Learning, Inc.
Consumer and Producer Surplus
$8
S
7
Price
6
5
CS
CS
CS
4
3
2
PS
PS
PS
D
1
1
2
3
Quantity
Copyright © 2002 by Thomson Learning, Inc.
4
26.3 Supply and Demand in
International Trade

When the domestic economy has a
comparative advantage in a good
because it can produce it at a lower
relative price than the rest of the world,
international trade raises the domestic
market price to the world price,
benefiting domestic producers but
harming domestic consumers.
Copyright © 2002 by Thomson Learning, Inc.
26.3 Supply and Demand in
International Trade

While this redistributes income from
consumers to producers, there are net
benefits from allowing free trade
because producer surplus increases
more than consumer surplus decreases.
Copyright © 2002 by Thomson Learning, Inc.
26.3 Supply and Demand in
International Trade


While domestic consumers lose from
the free trade, those negative effects
are more than offset by the positive
gains captured by producers.
In net, export trade increases domestic
wealth.
Copyright © 2002 by Thomson Learning, Inc.
Free Trade and Exports
SWORLD
Price
SDOMESTIC
PAT
PWORLD
Exports
a
b
World
Price
d
Net domestic gain
from trade
PBT
c
DWORLD
DDOMESTIC
Quantity of Wheat (world)
QBT
QAT
Quantity of Wheat (domestic)
Copyright © 2002 by Thomson Learning, Inc.
26.3 Supply and Demand in
International Trade


When a country does not produce a
good relatively as well as other
countries, international trade will lower
the domestic price to the world price,
with the difference between what is
domestically supplied and what is
domestically demanded supplied by
imports.
Domestic consumers benefit from
paying a lower price for the good,
increasing their consumer surplus.
Copyright © 2002 by Thomson Learning, Inc.
26.3 Supply and Demand in
International Trade


But domestic producers lose because
they are now selling at the lower world
price.
While this redistributes income from
producers to consumers, there is a net
increase in domestic wealth from free
trade and imports because the
consumer surplus increases more than
producer surplus decreases.
Copyright © 2002 by Thomson Learning, Inc.
Price of Shirts (world)
Free Trade and Imports
Price of S
SDOMESTIC
(dome
SWORLD
a
PBT
PWORLD
Net domestic gain
from trade
b
d
World
Price
PAT c
Imports
DWORLD
Quantity of Shirts (world)
QS
DDOMESTIC
QD
Quantity of Shirts (domestic)
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies

Tariffs



a tax on imported goods
usually relatively small revenue producers
that retard the expansion of trade
bring about
higher prices and revenues to domestic
producers,
 lower sales and revenues to foreign producers,
and
 higher prices to domestic consumers


The gains to producers are more than
offset by the losses to consumers.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies


With import tariffs, the domestic price of
goods is greater than the world price.
At the new price, the domestic quantity
demanded is lower and the quantity
supplied domestically is greater,
reducing the quantity of imported goods.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies

While domestic producers do gain more
sales and producer surplus at the
expense of foreign producers, and the
government gains from tariff revenue,
consumers lose more in consumer
surplus than producers and the
government gain from the tariff.
Copyright © 2002 by Thomson Learning, Inc.
Free Trade and Tariffs
Price of Shoes (world)
SDOMESTIC
a
SWORLD
SWORLD + TARIFF
a
PW +T
b
PWORLD
PW
c
f
e
SWORLD
Imports
After Tariff
DWORLD
Quantity of
Shoes (world)
d
QS
Q´S
Q´D
DDOMESTIC
QD
Imports Before Tariff
Quantity of Shoes (domestic)
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies


One argument for tariffs is that tariff
protection is necessary temporarily to
allow a new industry to more quickly
reach a scale of operation at which
economies of scale and production
efficiencies can be realized.
This argument has many problems.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies


How do you identify "infant industries"
that genuinely have potential economies
of scale and will become quickly
efficient with protection?
Would it not be wise to make massive
loans to the industry in such a case,
allowing it to instantly begin large-scale
production rather than slowly and at the
expense of consumers with a protective
tariff?
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies

The history of infant industry tariffs
suggests that the tariffs often linger long
after the industry is mature and no
longer in “need” of protection.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies


Tariffs can lead to increased output and
employment and reduced
unemployment in domestic industries
where tariffs were imposed.
Yet the overall employment effects of a
tariff imposition are not likely to be
positive.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies

Not only might the imposition of a tariff
lead to retaliatory tariffs by other
countries, but domestic employment
would likely suffer outside the industry
gaining the tariff protection.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies


If new tariffs lead to restrictions on
imports, fewer dollars will be flowing
overseas in payment for imports, which
means that foreigners will have fewer
dollars available to buy our exports.
Other things equal, this will tend to
reduce our exports, thus creating
unemployment in the export industries.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies


Sometimes it is argued that tariffs are a
means of preventing a nation from
becoming too dependent on foreign
suppliers of goods vital to national
security, but the national security
argument is usually not valid.
If a nation's own resources are
depletable, tariff-imposed reliance on
domestic supplies will hasten depletion
of domestic reserves.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies

From a defense standpoint, it makes
more sense to use foreign supplies in
peacetime and perhaps stockpile
“insurance” supplies so that large
domestic supplies would be available
during wars.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies



An import quota gives producers from
another country a maximum number of
units of the good in question that can be
imported within any given time span.
The case for quotas is probably even
weaker than the case for tariffs.
Like tariffs, quotas directly restrict
imports, leading to reductions in trade
and thus preventing nations from fully
realizing their comparative advantage.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies


Tariffs at least use the price system as
the basis of restricting trade, while
quotas do not.
Unlike with a tariff, the U.S. government
does not collect any revenue as a result
of the import quota.
Copyright © 2002 by Thomson Learning, Inc.
Price of Autos (world)
Free Trade and Import Quotas
SDOMESTIC
a
SWORLD
PW +Q
b
PWORLD
PW
f
d
c
e
SWORLD
Imports
After Quota
DWORLD
Quantity of
Autos (world)
SWORLD + QUOTA
a
QS
Q´S
Q´D
DDOMESTIC
QD
Imports Before Quota
Quantity of Autos (domestic)
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies

Nations have also devised still other,
more subtle means to restrict
international trade.

Product standards ostensibly designed to
protect consumers against inferior, unsafe,
dangerous or polluting merchandise,
which, in effect, are sometimes a means to
restrict foreign competition.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies


Except in rather unusual circumstances,
the arguments for tariffs and import
quotas are rather suspect.
They exist because of producers’
lobbying efforts to gain profits from
government protection, called rent
seeking.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies

Because these resources could have
produced something instead of being
spent on lobbying efforts, the measured
deadweight loss from tariffs and quotas
will likely understate the true
deadweight loss to society.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies



Working in the opposite direction,
governments sometimes try to
encourage exports by subsidizing
producers.
With a subsidy, revenue is given to
producers for each exported unit of
output, stimulating exports.
While not a barrier to trade like tariffs
and quotas, subsidies can also distort
trade patterns, leading to ones that are
inefficient.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies


With subsidies, producers export goods
not because their costs are lower than
that of a foreign competitor, but because
their costs have been artificially reduced
by government action transferring
income from taxpayers to the exporter.
The actual costs of production are not
reduced by the subsidy—society has
the same opportunity costs as before.
Copyright © 2002 by Thomson Learning, Inc.
26.4 Tariffs, Import Quotas, and
Subsidies



A nation's taxpayers end up subsidizing
the output of producers who, relative to
producers in other countries, are
inefficient.
The nation, then, exports products in
which it does not have a comparative
advantage.
Gains from trade in terms of world
output are eliminated or reduced by
such subsidies.
Copyright © 2002 by Thomson Learning, Inc.