macroeconomic mcgrowhill micro ch 23 19e use this one

Copyright 2008 The McGraw-Hill Companies• The Graphical Model of Comparative Advantage, Specialization, and the Gains From Trade • How Differences Between World Prices and Domestic Pri

Copyright 2008 The McGraw-Hill Companies

Copyright 2008 The McGraw-Hill Companies

• The Graphical Model of Comparative

Advantage, Specialization, and the Gains From Trade

• How Differences Between World Prices

and Domestic Prices Prompt Exports and Imports

• How Economists Analyze the Economic

Effects of Tariffs and Quotas

• The Rebuttals to the Most Frequently

Presented Arguments for Protectionism

• About the Assistance Provided Workers

Under the Trade Adjustment Act of 2002

• How the Offshoring of U.S Jobs Relates

to the Growing International Trade in Services

Some Key Trade Facts

• U.S trade deficit in goods

• $517 billion in 2009

• U.S trade surplus in services

• $138 billion in 2009

• Canada largest U.S trade partner

• Trade deficit with China

• $220 billion in 2009

• Exports are 13% U.S output

• Dependence on oil

Copyright 2008 The McGraw-Hill Companies

Some Key Facts

• U.S Sizable Trade Deficit with

China

• U.S Dependence on Oil is

Reflected

• U.S has World’s Highest Trading

Volume (Exports and Imports)

• China a Major Trade Force

• International Trade Links World

Economies

• International Trade is the Center

of Policy Debates

Some Key Trade Facts

• Principal U.S exports include:

Some Key Trade Facts

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China Japan France Netherlands

Italy United Kingdom

0 2 4 6 8 10 12

10.0 8.9

6.5 6.2 4.9 3.9

3.8 3.8

Source: World Trade Organization

Shares of World Exports, Selected Nations

Percentage Share of World Exports, 2004

Some Key Trade Facts

Economic Basis for Trade

• Nations have different resource

• 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

• Wheat sacrificed per ton of Coffee

LO2

Comparative Advantage

23-10

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35 40 45

35 40 45

Copyright 2008 The McGraw-Hill Companies

The Economic Basis for Trade

• Self-Sufficiency Output Mix

• Specializing Based on Comparative Advantage

• Gains from Trade

• Trading Possibility Line

– Improved Options – Added Output

W23.1

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

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35 40 45

35 40 45

W

c

w w’

Trading Possibilities Line

Trading Possibilities Line

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• The Case for Free

Trade

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Supply and Demand Analysis

of Exports and Imports

• World Price

• Domestic Price

• Supply and Demand in

the United States –U.S Export Supply

• Export Supply Curve

–U.S Import Demand

• Import Demand Curve

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Supply and Demand Analysis

of Exports and Imports

0

50 75 100 125 150

Quantity of Aluminum (Millions of Pounds)

1.50 1.25 1.00 75 50

0

50 100

Quantity of Aluminum (Millions of Pounds)

U.S.

Import Demand

Shortage = 50 Shortage = 100

U.S Aluminum Market

Copyright 2008 The McGraw-Hill Companies

Supply and Demand Analysis

of Exports and Imports

0

50 75 100 125 150

Quantity of Aluminum (Millions of Pounds)

1.50 1.25 1.00 75 50

0

50 100

Quantity of Aluminum (Millions of Pounds)

Canadian Import Demand

Shortage = 50

Canadian Aluminum Market

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Supply and Demand Analysis

of Exports and Imports

1.00 75

.88

0

50 100

Quantity of Aluminum (Millions of Pounds)

Canadian Import Demand e

World Market for Aluminum

U.S.

Export Supply

U.S.

Import Demand

Equilibrium

W23.2

Trade Barriers and Export

Economic Impact of Tariffs

Economic Impact of Quotas

Copyright 2008 The McGraw-Hill Companies

Copyright 2008 The McGraw-Hill Companies

Consider Tariff Impact

• Example of tariff gone awry:

Water Intensive California Rice (shortage of water and uncertain future of meeting water needs).

“The U.S government supports domestic rice production through tariffs on imported rice and direct taxpayer subsidies based on

production, prices, and historical acreage”

Copyright 2008 The McGraw-Hill Companies

• Smoot-Hawley Tariff Act

– Cheap Foreign Labor Argument

Economic Impact of Quotas

Multilateral Trade Agreements

• General Agreement on Tariffs and

Trade (GATT)

• World Trade Organization (WTO)

• European Union (EU)

• North American Free Trade

Agreement (NAFTA)

• Critics argue that it may allow nations

to circumvent environmental and

worker-protection laws

European Union

• Initiated in 1958 as Common Market

• Abolished tariffs and import quotas

between member nations

• Established common tariff with

nations outside the EU

• Created Euro Zone with one currency

• Agreement between U.S., Canada,

and Mexico

• Established a free trade zone

between the countries

• Trade has increased in all countries

• Enhanced standard of living

Trade Adjustment and Offshoring

• Trade Adjustment Assistance Act

• Designed to help individuals hurt by international trade

Petition of the Candlemakers

• Petition of candlemakers asking for

protection from natural light producers such as the sun

• Tongue-in-cheek argument supporting the idea of free trade

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• equilibrium world price