The Gains from International Trade

1
The Gains from International Trade

• Summarized from McConnell, C.R., Barbiero, T.P.,
  and Brue, S.L. (2007)

2

• The facts about Canadas international trade
• About specialization and comparative advantage
• About supply and demand analysis of exports and
  imports
• About trade barriers and their negative effects
  on nations economic well-being.

3
Key Facts of International Trade

• Exports 40 of Canadian GDP.
• Canadian exports and imports have almost doubled
  as a of GDP since 1971.
• In 2000 Canada had a 48.4 billion trade surplus
• Main Exports automotive products, machinery and
  equipment and forestry products. Main Imports
  automotive products, machinery and equipment.
• Major trading partners USA, Nations of Western
  Europe and Japan.

4
Conditions for Trade

• Uneven distribution of resources
• Different production technique / technology
• Differentiated products

5
The economic Basis for Trade

• Labour-intensive Goods
• Land-intensive Goods
• Capital-intensive Goods

6
Benefits of Trade

• Efficient resource utilization due to access to
  improved tech, specialization
• Greater welfare
• Peaceful relationship

7
Specialization
Absolute Advantage
8
Specialization

• Without Trade
• Production and Consumption Jim ? ½ chocolate bar
  and 1 pizza
• Production and Consumption Bob ? ½ Pizza and 1
  chocolate bar
• Total 1.5 Pizza and 1.5 chocolate bar

9
Specialization

• With Trade
• Production Jim ? 2 pizza and Bob ? 2 chocolate
  bar
• Exchange Jim ? 1 pizza to Bob and Bob ? 1
  chocolate bar to Jim
• Consumption Jim ? 1 pizza to Bob and Bob ? 1
  chocolate bar to Jim
• Total 2 Pizza and 2 chocolate bar.

10
Comparative Advantage
11
Analysis of Comparative Advantage

• Assumption
• Two countries, Canada and Brazil
• Constant cost
• Two products, Soybean and Steel
• Different costs of production
• Full employment
• Cost Ratio An equality showing the number of
  units of two products that can be produced with
  the same resources.
• Canada 1St 1Soy Brazil 1St 2Soy

12
Analysis of Comparative Advantage
13
Conclusion

• As a result of trade, both countries have both of
  more products. The effects of international trade
  are the equivalent of having more and better
  resources or discovering improved production
  techniques.

14
The Case for Free Trade Restated

• more efficient allocation of resources and a
  higher level of material well-being
• trade barriers lessen gains from specialization
• promotes competition and deters monopoly
• provides consumers with a wider range of product
  choices.
• links national interest and breaks down national
  animosities.

15
Supply and Demand Analysis of Exports and Imports

• The amount of goods and services that a nation
  will export or import depends on the difference
  between world and domestic price.
• World Price gt Domestic price ? Export
• World Price lt Domestic price ? Import
• World Price Domestic price ? ----
• World Price determined by world supply and
  demand
• Domestic Price determined by domestic supply and
  demand

16
Assumption

• Two countries, Canada and US
• No trade barriers, such as tariffs or quotas, and
  no transportation costs
• Different costs of production
• Full employment

17
Questions

• What is the equilibrium World Price? 1.12
• What is the equilibrium Exports and Imports?
  Canadian Import 25, US Export 25
• What are the domestic prices? 1.12
• What is the justification of the increased
  domestic price in US? Higher production costs
• Why would US willingly send products to Canada?
  To have something else which have greater value
  to US citizens compared to steel, such as
  telecommunication equipment

18
Trade Barriers

• Tariff
• Non-Tariff Barriers
• -- Import Quota
• -- Voluntary Export Restrictions

19
Types of Barriers

• Tariff
• Objective To obtain revenue or to protect
  domestic firms.
• Types of Tariff
• -- Revenue Tariff Example coffee.
• -- Protective Tariff
• 2. Non-Tariff Barriers
• -- Import Quota
• Example Japan, European countries, Great Britain
• -- Voluntary Export Restrictions Example Japan
  auto manufacturers.

20
Conclusion

• The gains that Canadian trade barriers create for
  protected industries and their workers come at
  the expenses of much greater losses for the
  entire economy. The result is economic
  inefficiency.

21
The Case for Protection A Critical Review

• Military Self-Sufficiency Argument
• Increased Domestic Employment Argument
• Diversification for Stability Argument
• Example Saudi Arabia (based on oil), Cuba (based
  on sugar)
• -- Shortcomings
• Infant-Industry Argument
• -- Counter-Arguments
• Protection Against Dumping Argument
• Cheap Foreign Labour Argument

22
Empirical Findings

• Great Britains shift towards freer international
  trade in the mid-nineteenth century was
  instrumental in its industrialization and growth
  at that time
• The creation of free trade area in Europe was a
  major ingredient in Western European prosperity
• The trend towards tariff reduction since 1945 has
  stimulated expansion of the world economy.

23
THE END