Lecture Macroeconomics - Chapter 17: The gains from international trade

Chapter 17 list the gains from international trade. In this chapter you will learn: The facts about Canada’s international trade, about specialization and comparative advantage, about supply and demand analysis of exports and imports, about trade barriers and their negative effects on nations’ economic well-being.

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In this chapter you will learn

The facts about Canada’s international

trade

About specialization and comparative

advantage

About supply and demand analysis of

exports and imports

About trade barriers and their negative

effects on nations’ economic well-being

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Chapter 17 Topics

Some Key Facts of International Trade

The Economic Basis for Trade

Specialization & Comparative Advantage

Supply & Demand Analysis of Exports &

Imports

Trade Barriers

The Case for Protection: A Critical Review

The World Trade Organization

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Some Key Facts

Exports are 40% of Canadian GDP

Canadian exports & imports have

almost doubled as a % of GDP since

1971

In 2000, Canada had a $48.4 billion

trade surplus

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Some Key Facts

of goods it exports

Canada imports some of the same categories

of goods it exports

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Some Key Facts

Most trade is with other advanced

nations, particularly the US

Improved transportation &

communications, declines in tariffs,

& peace have helped expand trade

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Shares of world exports, selected nations,

by North America, Japan, &

Western Europe

World trade is dominated

by North America, Japan, &

Western Europe

GLOBAL PERSPECTIVE 17.1

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Some Key Facts

Southeast Asian economies have

expanded their share of world trade

Russia, the Eastern European

nations, & mainland China have also

increased trade

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Some Key Facts

International trade links world

economies

International trade & finance is often

at the centre of economic policy

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Imports

Trade Barriers

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The Economic Basis for

Trade Why do nations trade?

The distribution of resources is

uneven

Efficient production requires

different technologies or resource

combinations

Products are differentiated as to

quality & other non-price attributes

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Tradelabour-intensive goods

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Trade labour-intensive goods

land-intensive goods

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Trade labour-intensive goods

land-intensive goods

capital-intensive goods

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Trade Distribution of resources may

change over time

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Imports

Trade Barriers

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Specialization &

Comparative Advantage The Basic Principle

specialization according to

comparative advantage reduces

costs

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Comparative AdvantageTwo isolated nations

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15 10 4 0

5 10 15 18 20 25 30 5 8 10 15 20

Figure 17-1

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the choice under self-sufficiency

Comparative Advantage

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Production Possibilities: Self-Sufficiency

15 10 4 0

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Principle of Comparative Advantage

Opportunity Cost Table

Country 1 Steel Cost 1 Soybean Cost

Canada 1 soybean 1 steel

Brazil 2 soybeans 5 steel

Who has the comparative advantage in steel?

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Principle of Comparative Advantage

Who has the comparative advantage in soy?

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Canada — comparative advantage in

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Production Possibilities Lines: Before Trade

15 10 4 0

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15 10 4

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what will the terms of trade be?

many possibilities

for trade to be mutually beneficial

the terms of trade must be

each nation’s opportunity costs

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for example:

1 steel for 1.5 soybeans

gains from trade can be illustrated

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Figure 17-2 45

15 10 4 0

Trading Possibilities Lines: After Trade

1.5 soy for 1 steel

Trading possibilities

line

Trading possibilities

line

.67 steel for 1 soy 67 steel for 1 soy

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Gains from Trade Improved Options

Added Output

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A more realistic model:

increasing opportunity costs

less than complete specialization

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Through free trade based on the principle

of comparative advantage, the world

economy can achieve a more efficient

allocation of resources & a higher level of

material well-being than without free trade

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Imports

Trade Barriers

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Supply & Demand Analysis of Exports

& Imports

When world prices

When world prices increase increase relative to

domestic prices, domestic

domestic prices, domestic exports exports will

increase, resulting in an

increase, resulting in an upward sloping upward sloping

export supply curve

When world prices

When world prices decrease decrease relative to

domestic prices, domestic

domestic prices, domestic imports imports will

increase, resulting in a

increase, resulting in a downward sloping downward sloping

import demand curve

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Canadian Export Supply and Import Demand

Cdn domestic aluminum market Cdn export supply and

1.25

1.00 75

Figure 17-3

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100 50

1.25

1.00 75

If the world price goes further up

Figure 17-3

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Cdn domestic aluminum market Cdn export supply and

1.25

1.00 75

If world prices fall below $1.25

Figure 17-3

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100 50

1.25

1.00 75

SHORTAGE = 50 IMPORTS = 50

Figure 17-3

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export supply

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U.S domestic aluminum market U.S export supply and

$1.50 1.25 1.00 75 50

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1.25 1.12 1.00

U.S.

export supply

U.S.

import

e

World price is where:

U.S export supply

=Cdn import demand

Figure 17-5

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1.25 1.12 1.00

U.S.

export supply

U.S.

import demand

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1.25 1.12 1.00

U.S.

export supply

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1.25 1.12 1.00

U.S.

export supply

U.S.

import demand

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P W set by interaction of world

demand and supply

only one price can persist for a

standardized commodity (ignoring

transportation costs and trade

barriers)

Supply & Demand Analysis of Exports

& Imports

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Imports

Trade Barriers

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quantity demanded increases to d quantity

supplied decreases to a

imports are a

d-Figure 17-6

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demanded decreases to c imports are c-b

imports

Figure 17-6

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Economic Impact of Tariffs

expansion of inefficient industries at

the expense of relatively efficient

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Economic Impact of Quotas

the same, without the tariff revenue

for the government

foreign firms reap the benefit of

higher prices

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Figure 17-6

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Net Costs of Tariffs & Quotas

Consumer costs

• price of imported product goes up

• some consumers shift purchases from

imports to higher-priced domestic goods

• prices of domestic goods rise

costs to consumers greatly exceed

gains to producers & government

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Net Costs of Tariffs & Quotas

Impact on Income Distribution

• low-income families affected

proportionately more

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Imports

Trade Barriers

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The Case FOR Protection

Military Self-Sufficiency Argument

Increase Domestic Employment

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Infant Industry Argument

Counterarguments:

• which industries?

• how long?

• other better methods

Strategic Trade Policy

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Protection Against Dumping

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The Case FOR Protection:

A Critical Review the arguments for protection are not

convincing

there is compelling historical

evidence that free trade has led to

prosperity & protectionism has led to

the opposite

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Imports

Trade Barriers

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The World Trade

Organization Trade liberalizations to be

implemented by 2005:

• tariff reductions

• new rules for trade in services

• reductions in agricultural subsidies

• new protections for intellectual property

• phasing out quotas on textiles &

apparel, & replacing them with declining tariffs

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The World Trade

Organization WTO has become the target of

protest groups

Debates about linking trade

liberalization to other political &

economic causes

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Imports

Trade Barriers

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