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Chapter 11 - International trade of goods. After completing this unit, you should be able to: Discuss the extent of U.S. international trade, explain the concepts of comparative advantage and absolute advantage, analyze the costs and benefits of international trade,...
Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock Chapter 11 International Trade of Goods Copyright © 2013 John Wiley & Sons, Inc / Photo Credit: ©Lee Pettet/iStockphoto PowerPoint Prepared by Z Pan After studying this chapter, you should be able to: Ø Ø Ø Ø Discuss the extent of U.S international trade Explain the concepts of comparative advantage and absolute advantage Analyze the costs and benefits of international trade Describe the distribution of the costs and benefits from international trade Copyright © 2013 John Wiley & Sons, Inc Ø Ø Ø Assess the arguments for and against limiting international trade Describe the costs, benefits, and mechanisms of limiting international trade Describe some of the forms of trade liberalization International trade Ø Ø Ø Ø Exports – Goods or services produced domestically but sold abroad Imports – Goods or services produced abroad but sold domestically Trade surplus – When a country ’s level of exports exceeds its level of imports Trade deficit – When a country ’s level of imports exceeds its level of exports Copyright © 2013 John Wiley World leading traders Copyright © 2013 John Wiley Top U.S trade partners Copyright © 2013 John Wiley WHY DO WE TRADE? Ø Countries trade goods and services for the same reasons that individual consumers and producers trade goods and services, namely because trade generates benefits to the trading partners Copyright © 2013 John Wiley Production possibilities Copyright © 2013 John Wiley Absolute advantage Ø Ø Landia has absolute advantage in the production of both computers and shoes relative to Seavia since Landia can produce more computers and shoes than Seavia But, what about comparative advantage? Copyright © 2013 John Wiley Which has comparative advantage in what? Landia Opportunity cost of shoes per day 1S = 3,000/450 = 6.67 computers ( C ), or 1S = 6.67C Opportunity cost of computer per day 1C = 0.15S Seavia Opportunity cost of shoes per day Copyright John Wiley= 1S =© 2013 1,200/300 4C per day, or Which has comparative advantage in what? Ø Ø Ø Ø Because Seavia can produce shoes at a lower opportunity cost than Landia, Seavia has comparative advantage in producing shoes Because the cost of producing a computer in Landia is lower than it is in Seavia, Landia has comparative advantage in producing computers Landia will specialize in producing computers (total 3,000 computers and no shoes) and Seavia will specialize in producing shoes (total 300,000 pairs of shoes and no computers) 10 Copyright © 2013 John Wiley Terms of trade Ø Ø Ø The Terms of Trade describes the price or rate of exchange of one good for another In order for two countries to be better off by trading, the terms of trade need to be between the two countries’ opportunity costs of production Which implies … Copyright © 2013 John Wiley 11 Terms of trade For Computers: 0.15S < 1C < 0.25S For Shoes’: 4C < 1S < 6.67C e.g 1C = 0.2S Or 1S = 5C Copyright © 2013 John Wiley 12 Production and consumption possibilities Landia trades 1,000 computers to Seavia for 200 units of shoes Copyright © 2013 John Wiley 13 Impact of exports Copyright © 2013 John Wiley 14 Impact of imports Copyright © 2013 John Wiley 15 Winners and losers from free trade Copyright © 2013 John Wiley 16 protectionism Protectionism is the limiting of free trade between countries by using tariffs, quotas, or other regulations Copyright © 2013 John Wiley 17 Arguments for protectionism Ø Protecting Jobs Ø National Security Ø Differences in Environmental or Labor Policy Copyright © 2013 John Wiley 18 Costs of protecting jobs Ø Ø Ø Restricting imports does protect jobs in some industries However, protection comes at a very high cost for a large number of other consumers, households, and businesses in the economy Average cost per job saved from protecting industries from import competition is estimated at $231,289 per year These costs come in the form of higher prices 19 Copyright 2013 protected John Wiley for© the goods and services themselves Ø FORMS OF TRADE RESTRICTIONS Ø Ø Ø Tariff – A tax on imported goods or services Quota – A restriction on the quantity of imported goods or services in a country Regulations - Technical or content requirements placed on imports as well as subsidies for domestically produced goods Copyright © 2013 John Wiley 20 Impact of tariff Copyright © 2013 John Wiley 21 Impact of quota Copyright © 2013 John Wiley 22 FORMS OF TRADE LIBERALIZATION Ø Regional Trade Agreements – Agreements by countries in a region to reduce trade restrictions among themselves (EU, NAFTA) World Trade Organization (WTO) – An international organization of 157 member states with the goal of reducing trade barriers throughout the world WTO acts as the official arbiter of trade disputes between countries and is the negotiator and administrator of WTO trade 23 Copyright © 2013 John Wiley Ø Questions/Discussions 1) a) b) c) It takes country A units of labor to produce computer and units of labor to produce TV It takes country B units of labor to produce computer and units of labor to produce TV Which country has absolute advantage in producing TVs? Which country has absolute advantage in producing computers? Which country has comparative advantage in producing TVs? Copyright © 2013 John Wiley d) Which country has comparative advantage 24 Key Concepts • • • • • • • • • • Exports Imports Trade surplus Trade deficit Terms of trade Protectionism Tariff Quota Regional trade agreements World Trade Organization Copyright © 2013 John Wiley 25 ... producing computers Landia will specialize in producing computers (total 3,000 computers and no shoes) and Seavia will specialize in producing shoes (total 300,000 pairs of shoes and no computers)... reducing trade barriers throughout the world WTO acts as the official arbiter of trade disputes between countries and is the negotiator and administrator of WTO trade 23 Copyright © 2013 John Wiley... It takes country A units of labor to produce computer and units of labor to produce TV It takes country B units of labor to produce computer and units of labor to produce TV Which country has absolute