After reading this chapter, you should be able to: List and discuss several key facts about international trade; define comparative advantage, and demonstrate how specialization and trade add to a nation''s output; describe how differences between world prices and domestic prices prompt exports and imports;...
20 InternationalTrade McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved SomeKeyTradeFacts Principal U.S exports include: Chemicals • Agricultural products • Consumer durables • Semiconductors • Aircraft Principal U.S imports include: • Petroleum • Automobiles • Metals • Household appliances • Computers U.S provides about 8.5% of world’s exports LO1 20-2 Economic Basis for Trade • Nations have different resource • • • LO2 endowments Labor-intensive goods Land-intensive goods Capital-intensive goods 20-3 Comparative Advantage • Assumptions • Two nations • Same size labor force • Constant costs in each country • Different costs between countries • U.S absolute advantage in both • Opportunity cost ratio • Slope of the curve • Vegetables sacrificed per ton of beef LO2 20-4 Comparative Advantage (a) United States 45 40 40 35 35 30 30 25 25 20 20 15 15 12 10 A 10 5 10 15 18 20 Beef (Tons) LO2 (b) Mexico Vegetables (Tons) Vegetables (Tons) 45 25 30 Z 10 15 20 Beef (Tons) 20-5 Comparative Advantage LO2 20-6 Comparative Advantage • Terms of trade • U.S 1V = 1B • U.S will sell 1B for more than 1V • Mexico 2V = 1B • Mexico will pay less than 2V for 1B • Settle between the two • Depends on supply/demand factors • Assume 1B = 1.5V LO2 20-7 Comparative Advantage • Gains from trade • Trading possibilities line • Slope equals terms of trade • Improved options • Complete specialization • More of both goods • More efficient resource allocation LO2 20-8 Trade Barriers and Export Subsidies • Tariffs • Revenue tariff • Protective tariff • Import quota • Nontariff barrier (NTB) • Voluntary export restriction • LO4 (VER) Export subsidy 20-9 Economic Impact of Tariffs • Direct effects • Decline in consumption • Increase in domestic production • Decline in imports • Tariff revenue • Indirect effects LO4 20-10 Economic Impact of Quotas • Decline in consumption • Increase in domestic production • Decline in imports • Quotas not provide for any government revenue but instead transfer it to foreign producers LO4 20-11 The Case for Protection • Military self-sufficiency • Diversification for stability • Infant industry • Protection against dumping • Increased domestic employment • Cheap foreign labor LO5 20-12 GATT • Three principles: • Equal, nondiscriminatory trade between member nations • Reduction in tariffs • Elimination of import quotas LO5 20-13 WTO • Established by Uruguay Round of • • • LO5 GATT 153 member nations in 2010 Oversees trade agreements and rules on disputes Critics argue that it may allow nations to circumvent environmental and worker-protection laws 20-14 European Union • Initiated in 1958 as Common Market • Abolished tariffs and import quotas • • LO5 between member nations Established common tariff with nations outside the EU Created Euro Zone with one currency 20-15 NAFTA • Agreement between U.S., Canada, • • • LO5 and Mexico Established a free trade zone between the countries Trade has increased in all countries Enhanced standard of living 20-16 ... world’s exports LO1 2 0-2 Economic Basis for Trade • Nations have different resource • • • LO2 endowments Labor-intensive goods Land-intensive goods Capital-intensive goods 2 0-3 Comparative Advantage... currency 2 0-1 5 NAFTA • Agreement between U.S., Canada, • • • LO5 and Mexico Established a free trade zone between the countries Trade has increased in all countries Enhanced standard of living 2 0-1 6... supply/demand factors • Assume 1B = 1.5V LO2 2 0-7 Comparative Advantage • Gains from trade • Trading possibilities line • Slope equals terms of trade • Improved options • Complete specialization