International Trade

1
International Trade
2
Introduction

• Understanding the Economic Issues of
  International Trade
• The benefits of trade
• The costs of trade
• The economic impact of trade restrictions

3
Comparative Advantageas a Basis for Trade

• The principle of comparative advantage tells us
  that we can all enjoy more goods and services
  when each country produces according to its
  comparative advantage, and then trades with other
  countries.

4
Production and Consumption Possibilities and the
Benefits of Trade

• Closed Economy
• An economy that does not trade with the rest of
  the world
• Open Economy
• An economy that trades with other countries

5
Production Possibilities Curve for a Many-Worker
Economy
Coffee (pounds/year)
Computers (number/year)
6
Production and Consumption Possibilities and the
Benefits of Trade

• A countrys PPC shows the quantities of different
  goods that its economy can produce.
• Consumption Possibilities
• The combinations of goods and services that a
  countrys citizens might feasibly consume

7
Production and Consumption Possibilities and the
Benefits of Trade

• In a closed economy
• Societys production possibilities consumption
  possibilities.
• If a country is self-sufficient, it is called
  autarky.

8
Production and Consumption Possibilities and the
Benefits of Trade

• In an open economy
• The societys consumption possibilities are
  typically greater than its production
  possibilities.

9
Buying and Selling in World Markets
10
Buying and Selling in World Markets
Consumption possibilities
Production possibilities
11
Buying and Selling in World Markets
Consumption possibilities
Production possibilities
12
Production Possibilities, Consumption
Possibilities, and the Optimal Production Mix for
an Open Economy
L
160,000
Consumption possibilities
150,000
E

• 50 lbs of coffee trades for 1 computer
• LM consumption possibilities
• G is the optimal combination for Costa Rica
• Costa Rica can use trade to locate anywhere along
  LM

A
120,000
100,000
C
G
Coffee (pounds/year)
50,000
D
Production possibilities
B
M
F
1,000
2,000
2,400
3,000
3,200
Computers/year
13
Production Possibilities, Consumption
Possibilities, and the Optimal Production Mix for
an Open Economy
L
160,000
Consumption possibilities
150,000
E

• Why produce at G?
• Slope of the PPC LM
• Domestic and international opportunity costs of
  acquiring an extra computer (in terms of forgone
  coffee) are equal

A
120,000
100,000
C
G
Coffee (pounds/year)
50,000
D
Production possibilities
B
M
F
1,000
2,000
2,400
3,000
3,200
Computers/year
14
A Straight-Line Production Possibilities Curve
A

• Observation
• The tradeoff between coffee and tea is constant
  at any point on the PPC

800
B
600
Coffee (pounds/year)
C
200
D
200
600
800
Tea (pounds/year
15
Two Consumption Possibilities Curves
16
Two Consumption Possibilities Curves
17
Consumption Possibilities Withand Without
International Trade

• What Do You Think?
• Where should Islandia produce if the price of
  coffee and tea were the same?

18
Consumption Possibilities Withand Without
International Trade

• Observations
• With a bow-shaped PPC consumption possibilities
  is typically maximized by producing where the PPC
  is tangent to the consumption possibilities line.
• With a straight-line PPC production is completely
  specialized.

19
Production and Consumption Possibilities and the
Benefits of Trade

• Economic Naturalist
• Does cheap foreign labor pose a danger to
  high-wage economies?

20
Production and Consumption Possibilities and the
Benefits of Trade

• Economic Naturalist
• Scenario
• U.S. and Fredonia produce software and beef.
• Real wages in Fredonia are lower than in the U.S.
• Fredonia is half as productive as the U.S. in
  beef production.
• Fredonia is one-tenth as productive in software
  production.

21
Production and Consumption Possibilities and the
Benefits of Trade

• Economic Naturalist
• Outcome
• Fredonia has a comparative advantage in beef.
• U.S. has a comparative advantage in software.
• The U.S. will trade software for beef and
  increase its consumption of both.
• Employment in the software industry in the U.S.
  increases and employment in the beef industry
  will decrease.

22
The Market forComputers in Costa Rica
Computer per year Without Trade
Computer per year With Trade
23
A Supply and Demand Perspective on Trade

• If the price of a good or service in a closed
  economy is greater than the world price, and that
  economy opens itself to trade, the economy will
  tend to become a net importer of that good or
  service.

24
The Market forCoffee in Costa Rica
Coffee (pounds/year) Without Trade
Coffee (pounds/year) With Trade
25
A Supply and Demand Perspective on Trade

• If the price of a good or service in a closed
  economy is lower than the world price, and that
  economy opens itself for trade, the economy will
  tend to become a net exporter of that good or
  service.

26
A Supply and Demand Perspective on Trade

• Observations of the Mutually Beneficial Gains
  from Trade
• Countries will profit by exporting the goods and
  services for which they have a comparative
  advantage.
• The revenue from the exports are used to import
  goods and services for which they do not have a
  comparative advantage.

27
A Supply and Demand Perspective on Trade

• Observations of the Mutually Beneficial Gains
  from Trade
• The markets will ensure that goods will be
  produced where opportunity cost is lowest.
• The consumption possibilities will be maximized.

28
Exercise 9.4
29
A Supply and Demand Perspective on Trade

• Winners and Losers from Trade
• Winners
• Consumers of imported goods
• Producers of exported goods
• Losers
• Consumers of exported goods
• Producers of imported goods

30
A Supply and Demand Perspective on Trade

• Protectionism
• The view that free trade is injurious and should
  be restricted
• Tariff
• A tax imposed on an imported good
• Quota
• A legal limit on the quantity of a good that may
  be imported

31
The Market for Computers after the Imposition of
an Import Tariff
Price of computers (/computer)
Computers per year
32
The Market for Computers after the Imposition of
an Import Tariff
Consumer surplus with tariff 1.44K/yr
Domestic supply
2,400
Tariff revenue 160K/yr
E
Price of computers (/computer)
World price tariff
1,200
World price
1,000
Imports with tariff
400
Domestic demand
Producer surplus with tariff 640K/yr
1,200
4,800
1,600
2,400
2,800
Computers per year
33
Exercise 9.5
Domestic supply
3,600

• Question
• Given the graph shown, how will a tariff of 300
  per computer affect total economic surplus?

2,100
Price of computers (/computer)
1,500
World price
1,200
600
Domestic demand
200
500
800
1,200
300
700
Computers per year
34
Protectionist Policies Tariffs and Quotas

• What do you think?
• Why did President George W. Bush support the
  imposition of tariffs on steel imported into the
  United States?

35
Protectionist Policies Tariffs and Quotas

• Quotas
• Legal limit on the number or value of foreign
  goods that can be imported
• Can be enforced by issuing permits

36
The Market for Computers after the Imposition of
an Import Quota
Price of computers (/computer)
Computers per year
37
The Market for Computers after the Imposition of
an Import Quota
Domestic supply
Consumer surplus with quota 1,440K/yr
2,400
E
Economic rent to holders of import licenses
80K/year
1,400
Price of computers (/computer)
1,000
World price
Imports 800 computers/year
400
Domestic demand
Producer surplus with quota 640K/yr
1,200
2,800
4,800
2,000
Computers per year
38
A Supply and Demand Perspective on Trade

• Quotas Tariffs
• Market effects of tariffs are the same.
• Tariffs generate tax revenue.
• Quotas generate revenue for the firms that hold
  an import license.

39
A Supply and Demand Perspective on Trade

• Question
• Why would the government ever impose a quota
  rather than a tariff?

40
A Supply and Demand Perspective on Trade

• Economic Naturalist
• Who benefited from and who was hurt by voluntary
  export restraints on Japanese automobiles in the
  1980s?

41
A Supply and Demand Perspective on Trade

• Other Barriers to Trade
• Red-tape barriers
• Regulations

42
A Supply and Demand Perspective on Trade

• The Inefficiency of Protectionism
• Trade barriers are inefficient and reduce the
  size of the economic pie.
• Because trade barriers benefit certain groups,
  and these groups may be well organized, they may
  be successful in lobbying for trade barriers.
• The gains from trade could be used to assist
  groups that have been hurt by trade.

43
Outsourcing

• Outsourcing
• A term increasingly used to connote having
  services performed by low-wage workers overseas

44
Outsourcing

• Outsourcing
• Outsourcing of services to low-wage foreign
  workers is exactly analogous to the importation
  of goods manufactured by low-wage foreign workers.

45
Outsourcing

• Economic Naturalist
• Paul Solman and his associate Lee Koromvokis
  produce video segments that provide in-depth
  analysis of current economic issues for the PBS
  evening news program, The NewsHour with Jim
  Lehrer.
• Is it likely that his job will someday be
  outsourced to a low-wage reporter from Hyderbad?

46
Outsourcing

• Characteristics of Jobs that are Less Susceptible
  to Outsourcing
• Less rules-based jobs
• Face-to-Face complex communication jobs
• Jobs that require the worker to be physically
  present

47
Outsourcing

• Responding to changing economic conditions
  requires the ability to adapt quickly to new
  circumstances.
• Education provides the means to develop a
  comparative advantage that is not rules-based and
  does require complex face-to-face communication.

48
End of Chapter