Isues in economics today 6th by guell chapter17

Chapter 17 International Trade: Does It Jeopardize American Jobs? McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Chapter Outline • • • • • What We Trade And With Whom The Benefits From Trade Barriers To Trade Trade As A Diplomatic Weapon Kick it Up and Notch: Costs of Protectionism McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-2 1-2 Exports and Imports As a percentage of GDP McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-3 1-3 What We Trade: Exports (2009) Good Elec Mach Aud & Video Motor Vehicles Transportation Equipment Petroleum Industrial Mach Services McGraw-Hill/Irwin Billions of Dollars of Exports 105.0 95.0 84.0 62.7 56.5 503.0 1,780.5 ©2012 The McGraw-Hill Companies, All Rights Reserved 17-4 1-4 What We Trade: Imports (2009) Good Billions of Dollars of Imports Petroleum Motor Vehicles Telecommunication Eq Elec Mach Aud & Video Office Machines Services Total McGraw-Hill/Irwin 329.6 179.1 137.3 119.7 113.5 370.0 2,282.1 ©2012 The McGraw-Hill Companies, All Rights Reserved 17-5 1-5 With Whom We Trade McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-6 1-6 Comparative and Absolute Advantage • Absolute Advantage: the ability to produce a good better, faster, or more quickly than a competitor • Comparative Advantage: the ability to produce a good at a lower opportunity cost of the resources used McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-7 1-7 The Benefits of Trade: When Comparative and Absolute Advantage are the same Suppose there are two countries, the United States and Brazil, and two goods, Apples and Coffee, and the production per unit of labor is shown in the table below United States Brazil Coffee Apples 2 Clearly, there are benefits from trade If the Americans focus on apples and the Brazilians focus on coffee and they trade with one another, more apples and more coffee is available to both countries McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-8 1-8 The Benefits of Trade: When Comparative and Absolute Advantage are Not the Same Now suppose the Americans are better at producing both goods The Americans have an absolute advantage in both but a comparative advantage in only Apples United States Brazil Coffee Apples 2 There are still benefits from trade If the Americans focus on apple production and the Brazilians focus on coffee production and they trade with one another more apples and coffee is available to both countries McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-9 1-9 Terms-of-trade • The amount of a good one country must give up in order to obtain another good from the other country, usually expressed as a ratio McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-10 1-10 Using Production Possibilities Frontiers Apples Brazil United States Apples Production Possibilities Frontier Production Possibilities Frontier Coffee McGraw-Hill/Irwin Coffee ©2012 The McGraw-Hill Companies, All Rights Reserved 17-11 1-11 Consumption Possibilities Frontier with Trade Apples Consumption Possibilities Frontier Coffee McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-12 1-12 Reasons For Limiting Trade That Many Economists Support • National Security • National Identity • Both of the above can be overstated easily • Environmental Concerns • Child-Labor Concerns McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-13 1-13 Reasons for Limiting Trade that Most Economists Do Not Support • To protect industries from competition • To temporarily aid an industry that is just emerging • To protect an industry from competition that is dumping (the exporting of goods below cost so as to drive competitors out-of-business) its products in the US McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-14 1-14 Methods of Limiting Trade • Tariffs: a tax on imports • Quotas: a legal restriction on the amount of a good coming into the country • Non-tariff barriers: barriers to trade that result from regulatory actions McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-15 1-15 Cost of Limiting Trade Domestic Market P S P World Market A S Pdomestic Pworld F C B Q’s Q Q’d d McGraw-Hill/Irwin Pworld E D D Q/t Q/t ©2012 The McGraw-Hill Companies, All Rights Reserved 17-16 1-16 Tariffs vs Quotas P S’ A Plimit F P* C } Tariff B E S Limiting trade with a quota Limiting trade with a tariff A tariff raises tax revenue and a quota does not D Qlimit Q* McGraw-Hill/Irwin Q/t ©2012 The McGraw-Hill Companies, All Rights Reserved 17-17 1-17 Costs of Protection • Whether there is a quota or a tariff there is deadweight loss This means that the gainers (the people who keep their jobs) gain less than the losers (the people who have to pay higher prices) lose • The average cost per job saved via trade barriers is estimated to be $169,000 per year McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-18 1-18 Trade as a Diplomatic Weapon • Trade sanctions have failed • To get Castro out of Cuba • To get Iran to release our hostages in 1979-1980 • To get the Soviet Union out of Afghanistan • To get Iraq out of Kuwait in 1990 McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-19 1-19 ... Reasons for Limiting Trade that Most Economists Do Not Support • To protect industries from competition • To temporarily aid an industry that is just emerging • To protect an industry from competition... industry from competition that is dumping (the exporting of goods below cost so as to drive competitors out-of-business) its products in the US McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies,... countries McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 17-9 1-9 Terms-of-trade • The amount of a good one country must give up in order to obtain another good from the