Chapter 17 International trade, after reading this chapter, you should be able to: Summarize U.S. trade patterns, explain how trade increases total output, tell how the terms of trade are established, discuss how trade barriers affect market outcomes, describe how currency exchange rates affect trade flows.
Chapter17 InternationalTrade Copyrightâ2014McGrawưHillEducation.Allrightsreserved.NoreproductionordistributionwithoutthepriorwrittenconsentofMcGrawưHillEducation TradeBalances Imports: goods and services purchased from foreign sources • Exports: goods and services sold to foreign buyers 172 Trade Balances • Imports and exports are seldom equal – The trade balance is the difference between exports and imports: Trade balance = Exports – Imports 173 Trade Balances • Trade deficit: the amount by which the value of imports exceeds the value of exports in a given time period • Trade surplus: the amount by which the value of exports exceeds the value of imports in a given time period 174 Table 17.1 175 Motivation to Trade • Specialization increases total output • The gain from trade increases world output and thus generates a higher standard of living in both countries • Consumers in both countries gain more choice and can buy at lower prices 176 Production and Consumption Possibilities • Consumption possibilities: the alternative combinations of goods and services that a country could consume in a given time period – No trade? A country’s consumption possibilities must equal its production possibilities – International trade breaks the link between production possibilities and consumption possibilities 177 Figure 17.1 178 Production and Consumption with Trade • Changing the mix of output results in a higher level of total output • International trade allows each country to specialize in what it does best • With trade, a country’s consumption possibilities exceed its production possibilities 179 Trade Increases Specialization and Output • The increase in the combined output of both countries is the gain from trading • The gains from trade are due to specialization in production 1710 Comparative Advantage • Comparative advantage: the ability of a country to produce a specific good at a lower opportunity cost than its trading partners • A country should specialize in producing goods and services for which it has the lowest opportunity cost 1711 Comparative Advantage • Comparative advantage refers to the relative (opportunity) costs of producing particular goods • World output, and thus the potential gains from trade, will be maximized when each country pursues its comparative advantage 1712 Absolute Costs Don’t Count • Absolute advantage: the ability of a country to produce a specific good with fewer resources (per unit of output) than other countries • It is not the absolute cost of production that determines a nation’s comparative advantage, it is the opportunity cost 1713 Limits to the Terms of Trade • A country will not trade unless the terms of trade are superior to domestic opportunity costs • The terms of trade between any two countries will lie somewhere between their respective opportunity costs in production 1714 The Market Mechanism • Import/export decisions are made by consumers and producers • Market participants focus on prices • The terms of trade, like the price of any good, depend on the willingness of market participants to buy or sell at various prices 1715 Protectionist Pressures • Although the potential gains from world trade are impressive, not everyone supports free trade 1716 Microeconomic Losers • Workers and producers who compete with imported products – who work in import-competing industries –have an economic interest in restricting trade • Trade can redistribute income from high-cost import-competing industries to low-cost, internationally competitive export industries 1717 The Net Gain • The gains from trade are greater than the losses • Consumers in general enjoy a higher standard of living as a result of international trade • Trade restrictions designed to protect special interests reduce the total gain from trade, and consumers pay more 1718 Barriers to Trade • The losses associated with imports give rise to a constant clamor for trade restrictions • These are two types of barriers to trade: – Tariff: a tax (duty) imposed on imported goods – Quota: a limit on the quantity of a good that may be imported in a given time period 1719 Exchange Rates • So long as each nation has its own currency, every trade will require use of two different currencies at some point • Exchange rate: the price of one country’s currency expressed in terms of another country’s currency 1720 Appreciation/ Depreciation • Whenever exchange rates change, so does the global price of all imports and exports – Currency appreciation: an increase in the value of one currency relative to another – Currency depreciation: a decrease in the value of one currency relative to another 1721 Appreciation/ Depreciation • Depreciation: – If the value of the U.S dollar declines: • U.S exports become cheaper • U.S imports become more expensive • Appreciation: – If the value of the U.S dollar increases: • U.S exports become more expensive • U.S imports become cheaper 1722 Foreign Exchange Markets • Exchange rates change when either the supply or the demand for a currency shifts 1723 Figure 17.3 1724 WTO • The WTO was created to replace GATT • In effect, the WTO is now the world’s trade police force • The WTO is empowered to: – Cite nations that violate trade agreements – Impose remedial action when violations persist 1725 ... value of imports exceeds the value of exports in a given time period • Trade surplus: the amount by which the value of exports exceeds the value of imports in a given time period 17 4 Table 17. 1 17 5... possibilities and consumption possibilities 17 7 Figure 17. 1 17 8 Production and Consumption with Trade • Changing the mix of output results in a higher level of total output • International trade... trade • Trade can redistribute income from high-cost import-competing industries to low-cost, internationally competitive export industries 17 17 The Net Gain • The gains from trade are greater