Lecture Introduction to economics: Social issues and economic thinking: Chapter 11 - Wendy A. Stock

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,...

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Introduction to Economics: Social Issues and Economic Thinking

Wendy A Stock

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Ø Discuss the extent of U.S

international trade

Ø Explain the concepts of

comparative advantage and

absolute advantage

Ø Analyze the costs and benefits

of international trade

Ø Describe the distribution of the

costs and benefits from

international trade

Ø Assess the arguments for and against limiting international trade

Ø Describe the costs, benefits, and mechanisms of limiting international trade

Ø Describe some of the forms of trade liberalization

After studying this chapter, you should be

able to:

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Ø Exports – Goods or services produced

domestically but sold abroad

Ø Imports – Goods or services produced abroad

but sold domestically

Ø Trade surplus – When a country ’s level of

exports exceeds its level of imports

Ø Trade deficit – When a country ’s level of imports exceeds its level of exports

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International trade

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World leading traders

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Top U.S trade partners

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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.

WHY DO WE TRADE?

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Production possibilities

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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.

Ø But, what about comparative advantage?

Absolute advantage

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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 = 0.25S

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Which has comparative advantage in what?

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Ø Because Seavia can produce shoes at a lower opportunity cost than Landia, Seavia has

comparative advantage in producing shoes

Ø Because the cost of producing a computer in Landia is lower than it is in Seavia, Landia has comparative advantage in producing computers

Ø Landia will specialize in producing computers (total 3,000 computers and no shoes) and

Ø Seavia will specialize in producing shoes (total

Which has comparative advantage in what?

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Ø The Terms of Trade describes the price or rate of exchange of one good for another

Ø 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.

Ø Which implies …

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Terms of trade

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Landia trades 1,000 computers to Seavia for 200 units of shoes

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Production and consumption possibilities

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Impact of exports

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Impact of imports

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Winners and losers from free trade

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Protectionism is the limiting of free trade between countries by using tariffs, quotas, or other

regulations

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protectionism

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Ø Protecting Jobs

Ø National Security

Ø Differences in Environmental or Labor Policy

Arguments for protectionism

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Ø Restricting imports does protect jobs in some

industries

Ø However, protection comes at a very high cost for a large number of other consumers,

households, and businesses in the economy

Ø Average cost per job saved from protecting

industries from import competition is estimated

at $231,289 per year

Ø These costs come in the form of higher prices

for the protected goods and services themselves and from higher prices for the products that use protected goods as inputs

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Costs of protecting jobs

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Ø Tariff – A tax on imported goods or services.

Ø Quota – A restriction on the quantity of imported goods or services in a country

Ø Regulations - Technical or content requirements placed on imports as well as subsidies for

domestically produced goods

FORMS OF TRADE RESTRICTIONS

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Impact of tariff

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Impact of quota

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Ø Regional Trade Agreements – Agreements by countries in a region to reduce trade restrictions among themselves (EU, NAFTA)

Ø 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 agreements ratified by its members

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FORMS OF TRADE LIBERALIZATION

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1) It takes country A 2 units of labor to

produce 1 computer and 2 units of labor to produce 1 TV It takes country B 3 units of labor to produce 1 computer and 4 units of labor to produce 1 TV.

a) Which country has absolute advantage in

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• Regional trade agreements

• World Trade Organization

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