International Trade

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International Trade Chapters 18 19
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Mercantilism In the 17th and 18th Century,
economists used to advise their governments to
try to amass as much gold as possible. Adam
Smith's Wealth of Nations argued against this
view and advocated "free trade" instead. This
old argument is almost the same as the
argument that continues to the present day
between those advocating protectionism versus
those advocating free trade.
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Why do nations trade? 1. Specialization of
factors. 2. Not possible to move around all
factors. 3. Endowments. Emphasis among these
three Products are usually more mobile than
factors.
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The law of comparative advantage ...people or
countries specialize in those activities in which
they have the greatest advantage or the least
disadvantage compared with other people or
countries. Hint This will be the activity in
which they incur the lowest opportunity cost
compared to other people or countries.
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Hypothetical Example of Comparative Advantage in
a special case.
Each country here has an absolute advantage in a
good.
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Hypothetical example of comparative advantage a
more complicated special case.
Japan has an absolute advantage in both goods,
yet US has the comparative advantage in computers.
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Notice that the opportunity costs for the
other good (TVs) are just reciprocals of those in
the previous case.
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What is the significance of the fact that the
opportunity costs of one good are just
reciprocals of the opportunity costs of the other
good? Hint The answer to this questions
answers or helps to answer the following
question Will a country always have a
comparative advantage in some good?
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The Effects of Trade.
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Does free trade pay for the low tariff country?
GDP Growth Rates
Lowest Highest Protection Protection Countries
Countries ---------------------------------------
---- 1.3 annually 3.8 annually 26
countries 21 countries
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Discussion Topics 1. NAFTA 2. The European
Union 3. What is the US comparative advantage in
real life?
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How economists argue for free trade Positive
points for free trade 1. Exports pay for
imports. "If the US, or any country,
restricts imports, it necessarily
restricts exports." 2. Protection costs the
average American, while free trade benefits
the average American. Rebuttal against the
protectionist arguments 1. Low foreign wages. 2.
Dumping. 3. Infant industries. 4. Keeping the
money in the country. 5. Saving domestic
jobs. Nonprotectionist arguments for tariffs 1.
National defense. 2. Foreigner-will-pay argument.
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International Monetary System 1. Foreign
exchange and the value of the dollar. 2.
Purchasing power parity. 3. Fixed exchange rates
versus free-floating exchange rates. 4. The
Balance of Payments
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The U.S. Balance of Payments 1994 1. Exports of
goods and services............... 833 2. Imports
of goods and services............... -954 3. Net
unilateral transfers abroad .............
-34 4. Balance on current account.................
.. -156 5. Net capital movements.................
........ 189 6. Statistical
discrepancy.......................... -33 7.
Total of above items.............................
0 8. Increase in US official reserve
accts.... -5 9. Increase in foreign
official assets in US 39