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Economics
TENTH EDITION
by David Begg, Gianluigi Vernasca, Stanley
Fischer & Rudiger Dornbusch
Chapter 28
International trade
©McGraw-Hill Companies, 2010
Exports as % of GDP
World trade has
grown at an
average annual
rate of 8 % since
1950.
80
70
60
50
40
1967
2009
30
20
10
0
Source: OECD, Economic Outlook.
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Between 1960 and
2009, UK exports as
a fraction of GNP
rose from 18% to
27%.
World exports are
now around 20% of
world GNP.
Trade patterns, 1980 -2008 (% of world exports)
Destination
1980
2008
Developed
Other
Developed
Other
Origin
Developed
50
21
41
16
21
8
24
19
Countries
Other
Source: UNCTAD, Handbook of Statistics, 2009 (at www.unctad.org).
As late as 1980, the developed countries were the origin and
destination of 71% of world exports, most of this trade being among
themselves.
The rapid growth of emerging market economies and the economic
liberalization of the former Soviet Union and Eastern Europe has
changed this.
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Merchandise trade patterns, 2008,
(% of region’s exports)
agriculture
World
N. America
Europe
CIS
Africa
Middle East
Asia
8.5
10.4
9.3
6.8
6.8
2.4
6
fuels,
manufactures
minerals
22.5
17
11.9
66.8
70.6
74.1
12.4
66.5
68
76.8
24.9
17.9
21.6
79.2
Sources: GATT, Networks of World Trade, 1955–76;
www.wto.org.
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The mature economies
of Europe and North
America and the Asian
economies export
mainly manufactures.
The Commonwealth of
independent states (ex
Soviet Union), Africa,
and the Middle East
mainly export oil and
other minerals.
Some important issues
• Raw materials prices
– Less-developed countries (LDCs) have claimed exploitation
by industrial countries
• e.g. by buying raw materials cheaply & selling
manufactures dear
• Agricultural protection
– farmers in rich countries benefit from both subsidies and
tariff protection.
– LDCs lose by selling less
– and with a restricted market, at lower prices
• Manufactured exports from LDCs
– some LDCs have had success in exporting manufactures
– leading to complaints that jobs are under threat in the
industrial countries
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Some important issues (2)
• Globalisation
– Lower transport costs and better information technology
are gradually breaking down the segmentation of national
markets and increasing competition between countries.
– A trend reinforced by a reduction in tariffs
• A level playing field?
– Poor countries feel that the process is largely dictated by
rich countries according to their own self-interest.
– Raising the demand for LDC exports, reducing agricultural
protection in rich countries would help LDCs substantially.
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Comparative advantage
• Trade offers benefits when there are
international differences in the opportunity cost
of goods.
• Opportunity cost of a good
– the quantity of other goods sacrificed to
make one more unit of that good
• The law of comparative advantage
– states that countries should specialise in
producing and exporting the goods that they
produce at a lower relative cost than other
countries.
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The source of comparative advantage
• An important difference between countries is in factor
endowments,
• which will be reflected in different relative factor prices
– e.g. if country A has relatively abundant capital but
relatively scarce labour compared with country B,
– then A would tend to specialize in capital-intensive
goods,
– and B would tend to specialize in labour-intensive
products.
• Comparative advantage may also reflect a relative
advantage in technology.
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Gainers and losers
• Countries may gain from specialisation
and trade
– but not all countries may gain equally
• Commercial policy
– is government policy that influences
international trade through taxes or
subsidies
•e.g. tariffs
– or through direct restrictions on imports
and exports.
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The economic effects of a tariff
DD and SS show the domestic
demand and supply for a good.
SS
If the world price is Pw,
and there is free trade,
domestic firms supply Qs
domestic demand is Qd
P w+ T
Pw
DD
Qs Qs'
Qd' Qd Quantity
and the difference is imported.
A tariff can stimulate domestic
supply and restrict imports.
At a domestic price Pw+T,
where T is the size of the tariff.
Domestic demand falls to Qd',
domestic supply rises to Qs‘ and
imports fall.
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The welfare costs of a tariff
SS
The tariff leads both to
transfers and net social
losses.
The government raises
revenue – i.e. there is a
transfer to the government,
Pw + T
Pw
A
B
DD
Qs Qs'
and there is a transfer in
the form of extra profits to
producers.
Qd' Qd Quantity
There is a social cost from production inefficiency, given that the
good could be imported at Pw, and a loss of consumer surplus.
A is the amount society spends by producing goods it could import more cheaply.
B is the excess of consumer benefits over social marginal cost that is lost.
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Tariffs
• The deadweight burden of a tariff
suggests that society suffers from this
method of restricting trade.
• This is the case for free trade.
• Tariffs have fallen substantially under
the GATT
– General Agreement on Tariffs and
Trade
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The case for tariffs – good
arguments
• Optimal tariff
– a first-best argument
– only valid where the importing country is large
enough to affect the world price.
• This policy fulfils the principle of targeting
– which says that the most efficient way to attain a
given objective is to use a policy that influences
that activity directly.
– Policies that attain the objective, but also
influence other activities are second-best,
because they distort those other activities.
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The case for tariffs – second-best
arguments
• Way of life
– an attempt to preserve ‘traditional’ ways
– a production subsidy would be better
• Suppressing luxuries
– an attempt to curb consumption patterns
of the rich in a poor society
– better achieved by a consumption tax
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The case for tariffs – second-best
arguments (2)
• Infant industries
– an attempt to nurture new activities via learning
by doing
– a temporary production subsidy probably better
• Revenue
– tariffs raise government revenue
– but there are better ways
• Cheap foreign labour
– a non-argument – denies benefits of
comparative advantage
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Other commercial policies
• Although tariff rates have fallen under
GATT, there has been a proliferation of
other trade restrictions
– quotas
– non-tariff barriers
•administrative regulations that
discriminate against foreign goods
– export subsidies
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An export subsidy
Under free trade, with the
world price at Pw,
S
Pw + s
production is Qs
B
G
Subsidy
E
World
price
Price
Pw
A
consumers demand Qd
exports are GE.
With a subsidy, producers
produce Qs’ and supply Qd' to
the domestic market.
Exports now rise to AB.
DD
Qd ' Qd
Qs Q`s'
Quantity
Social costs arise from
production inefficiency
and the loss of consumer surplus.
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