Transcript International trade

International Trade
•Patterns and Trends in International Trade
•Gains from trade
•Absolute and comparative advantage revisited
•Tariffs
•Quotas
•Welfare loss from trade restrictions
•Arguments for trade restrictions
Imports and Exports of the U.S., Chained 2000 Dollars
2000
1800
1600
1400
1200
Exports
1000
Imports
800
600
400
200
Year
Source: www.bls.gov
2004
2002
2000
1999
1997
1995
1993
1992
1990
1988
1986
1985
1983
1981
1979
1978
0
Year
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
(Exports + Imports)/GDP , U.S.
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Import Share of Gross Domestic Product in the USA (Percent)
20
Recessions are shaded
18
16
14
12
10
8
1980
1985
1990
1995
2000
Year/Quarter
Source: Bureau of Economic Analysis
2005
Figure 1: Net Exports of the United States
Billions of chained 2000 dollars
0
-100
-200
-300
-400
-500
-600
-700
90
92
94
96
98
00
02
04
Year/Quarter
Source: Bureau of Economic Analysis
06
08
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Percent
U.S. Trade Deficit as a Percent of GDP
7
6
5
4
3
2
1
0
-1
-2
Year
Composition of U.S. Imports and Exports
• Composition of US merchandise exports and
imports in 2006
7
U.S. production as a percentage of U.S.
consumption for various commodities
Percent
If U.S. production is <100% of consumption, imports make up the difference.
If U.S. production exceeds U.S. consumption, then the difference is exported.
8
Ricardo’s principle of
comparative advantage shows
how trade between nations
can be mutually beneficial
Production possibilities for United States and
Izodia
(a) United States
Production possibilities with 100 million workers
(millions of units per day)
Food
Clothing
U1
U2
U3
U4
U5
U6
600
0
480
60
360
120
240
180
120
240
0
300
(b) Izodia
Production possibilities with 200 million workers
(millions of units per day)
Food
Clothing
I1
I2
I3
I4
I5
I6
200
0
160
80
120
160
80
240
40
320
0
400
11
Production possibilities frontiers for the United
States and Izodia without trade (millions of units per
day)
(b) Izodia
(a) United States
500
Food
400
300
200
100
U1
600
500
U2
400
U3
Food
600
U4
300
200
U5
100
U6
0
100 200 300 400 Clothing
Slope: opportunity cost of an additional
unit of food is ½ unit of clothing
0
I1
I2
I3
I4
I5
I6
100 200 300 400 Clothing
An additional unit of food costs 2 units of
clothing.
Food is produced at a lower opportunity cost in the United States.
12
Measuring opportunity cost:
For the United States
•Food: 60 clothing/120 food = ½ clothing per food.
•Clothing: 120 food/60 clothing = 2 food per clothing
For Izodia
•Food: 80 clothing/40food = 2 clothing per food
•Clothing: 40 food/80 clothing = ½ food per clothing
Thus the Unites States has the comparative
advantage in food and Izodia has the
comparative advantage in clothing.
How much of one good exchanges for a unit of
another good.
As long as the Americans can
get more than ½ unit of
clothing for each unit of food ,
and as long as the Izodians can
get more than ½ unit of food
for a unit of clothing, both
sides benefit from
specialization and trade
These terms work for both
sides
Production (and consumption) possibility
frontiers with trade (millions of units per day)
(b) Izodia
(a) United States
600
600
500
500
U
300
200
U4
300
100 200 300 400 Clothing
I
200
100
100
0
400
Food
Food
400
0
I3
100 200 300 400 Clothing
Trade: 1 unit of clothing for 1 unit of food. Both countries are better off as a result of
international trade.
16
No Trade
Trade
Gain
United States
Clothing
Food
(units)
(units)
180
240
200
400
20
160
Izodia
Clothing
Food
(units)
(units)
160
120
200
200
40
80
•Trade embargos: Prohibitions on the importation (or exportation) of
goods and services. Examples: 1973 Oil embargo, trade embargo
with Iraq, embargo on imported sugar from Cuba.
•Tariffs: Taxes imposed on imported goods.
•Quotas: Limits on the quantity or value of goods or services that can
be imported or exported. Examples: The textile quota, the sugar
quota, export quota on raw timber.
•Subsidies: payments by government to exporters. These stimulate
trade by allowing the exporter to charge a lower price.
•Health and safety standards—such as European ban
on genetically-modified soybeans and hormonetreated beef.
•Product design standards
•Licensing requirements
•Bureaucratic red tape
The Japanese trade ministry
(MITI) decided that snow skis
made in the U.S. were not safe
enough for Japanese ski
enthusiasts
Consumer and producer surplus from market
exchange
Price per pound
Consumer
surplus
S = marginal cost
$0.50
0.25
0
Producer
surplus
D = marginal benefit
60
Chicken
(pounds per day)
20
Effect of a tariff
Price
per pound
S
$0.15
0.10
a
b
c
d
At a world P=$0.10 per pound, US consumers
demand 70 mill. pounds of sugar per month, and US
producers supply 20 mill. pounds per month; the
difference is imported.
Tariff= $0.05 per pound; P=$0.15 per pound.
US producers increase production to 30 mill.
pounds; US consumers cut back to 60 mill. pounds.
Imports fall to 30 mill. pounds.
f
D
a = increase in producer surplus
c = government revenue from the tariff
60 70 Sugar millions of
pounds per month)
b = higher marginal cost of domestically producing sugar that could have been
produced more cheaply abroad.
d = loss of consumer surplus from the drop in consumption
0
20 30
Consumers are worse off. Loss of consumer surplus: areas a, b, c, and d.
b+d = Net welfare loss to the US economy
21
S
S’
e
$0.15
S’
$0.15
a
0.10
0.10
Sugar
20
50
70
(millions of pounds per month)
b
c
d
D
D
0
S
Price
per pound
Price
per pound
Effect of a quota
0
20 30
60 70 Sugar
(millions of pounds per month)
Quota=30 mill., world price=$0.10. S’=supply curve (imports and US production; new price
$0.15: intersection of D and S’.
Loss of consumer surplus: a+b+c+d;
a = transfer from US consumers to US producers;
b+d = net loss; c = gain for sellers of foreign-grown sugar
22
Given the preceding analysis , why
are trade restrictions so pervasive?
•National security
•Save domestic jobs
•Anti-dumping
•Infant industry