International Trade, Comparative Advantage,

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International Trade, Comparative Advantage,
Protectionism

• Macroeconomics CHAPTER 20

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Introduction

• This section begins to consider the connections
  of the U.S. economy to the economies of the rest
  of the world.

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Trade Surpluses and Deficits

• When a country exports more than it imports it
  has a trade surpluses When it imports more than
  it exports it runs a deficit.
• What is the present situation for the U.S.?

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The Economic Basis for Trade Comparative
Advantage

• According to David Ricardo, trade enables
  countries to specialize in producing the products
  they produce best and so will benefit all trading
  partners.

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A. Absolute Advantage Versus Comparative Advantage

• A country enjoys an absolute advantage if it uses
  fewer resources to produce that product than
  another country does.
• It enjoys comparative advantage if it can produce
  the good at a lower cost in terms of other goods.
• 1. Gains from mutual absolute advantage seem
  obvious. But what about the case in which one
  country has the absolute advantage in the
  production of both goods?

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• 2. Gains from comparative advantage result when
  one country can produce one good at a lower cost
  in terms of other goods than the other. Mutually
  beneficial trade can result.
• 3. Why does Ricardos plan work? Because the
  combined output is maximized.

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B. Exchange Rates

• Exchange rates are the ratios at which two
  currencies are traded. They determine the terms
  of trade.
• 1. Trade and exchange rates in a
  two-country/two-good world exchange rates will
  settle at a level at which trade flows in both
  directions.

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• 2. Exchange rages and comparative advantage if
  exchange rates end up in the right ranges the
  free market will drive each country to shift
  resources into those sectors in which it enjoys a
  comparative advantage.

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The Sources of Comparative Advantage

• Most economists look to factor endowments as the
  principal sources of comparative advantage They
  seem to explain a significant portion of actual
  world trade patterns.

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• A. The Hecksher-Ohlin theorem ties the theory of
  comparative to factor endowments.
• The idea is that a country with a lot of one
  resource will have the comparative advantage in
  producing a product that requires a lot of that
  resource to make.

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• B. Other explanations for observed trade flows
  many countries both import and export the same
  kinds of goods because of product
  differentiation.
• There may also be economies of scale from
  producing for a world market.
• What does the U.S. Export?What does it import? Do
  the same products show up in each category?

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Trade Barriers

• Tariffs, export subsidies, and quotas.
• These obstacles to trade are forms of protection
  shielding some sector of the economy from foreign
  competition.

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Trade Barriers

• A tariff is a tax on imports.
• Export subsidies are payments made to domestic
  firms to encourage exports A related concept is
  dumping, which is when a firm sells its product
  for a lower price on the global market than it
  does domestically.
• A quota is a limit on the quantity of import.
  They can be mandatory or voluntary.

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• A. U.S. Trade policies GATT since 1940s the
  U.S. Has been part of global efforts to reduce
  and eliminate tariffs and other trade obstacles.
• B. Economic integration occurs when two or more
  nations join to form a free-trade zone. Examples
  are the European union and north American free
  trade agreement (NAFTA).

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Free Trade or Protection?

• A. The case for free trade is the theory of
  comparative advantage Trade has potential
  benefits for all nations. Tariffs and other trade
  barriers result in a loss of efficiency.
• B. The case for Protection

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• Protection saves jobs.
• Some countries engage in unfair trade practices
  and sometimes we have to fight back.
• Cheap foreign labor makes competition unfair.
• Protection safeguards national security because
  some industries are vital for national defense.
• Protection discourages dependency.
• Protection safeguards infant industries until
  they can compete on their own.