1. Copyright 2008 The McGraw-Hill Companies 35-1 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show 35 International Trade

2. Copyright 2008 The McGraw-Hill Companies 35-2 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Chapter Objectives 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

3. Copyright 2008 The McGraw-Hill Companies 35-3 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Some Key Facts U.S. Trade Deficit $647 Billion in Goods in 2010 U.S. Trade Surplus $151 Billion in Services in 2010 U.S. Exports Chemicals, Consumer Durables, Agricultural Products, Semiconductors U.S. Imports Petroleum, Automobiles, Appliances, Computers Some of Same Categories are Exported and Imported Canada Largest U.S. Partner Quantitatively

4. Copyright 2008 The McGraw-Hill Companies 35-4 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show 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 are 11% of U.S. Output China a Major Trade Force International Trade Links World Economies International Trade is the Center of Policy Debates

5. Copyright 2008 The McGraw-Hill Companies 35-5 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Some Key Facts GLOBAL PERSPECTIVE China Germany United States Japan Netherlands France Italy Belgium 0 2 4 6 8 10 12 9.5 8.9 8.2 4.9 4 3.8 3.4 3.2 Source: World Trade Organization Shares of World Exports, Selected Nations Percentage Share of World Exports, 2009

6. Copyright 2008 The McGraw-Hill Companies 35-6 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show The Economic Basis for Trade Labor-Intensive Goods- –goods in which design and production require skilled labor(electronics) Land-Intensive Goods- –goods that require abundant natural resources & supply of unskilled labor(agriculture) Capital-Intensive Goods –inexpensively produced goods from large amounts of capital resources(cars, chemicals, equipment)

7. Copyright 2008 The McGraw-Hill Companies 35-7 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Comparative Advantage Graphical Analysis Two Isolated Nations –Constant Costs(not increasing costs) –Different Costs-different resource mixes by each country U.S. Absolute Advantage in Both Products Opportunity Cost Ratio- exchange ratio Graphically…

8. Copyright 2008 The McGraw-Hill Companies 35-8 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show The Economic Basis for Trade Coffee (Tons) 30 25 20 15 10 5 0 35 40 45 51015202530 Wheat (Tons) Coffee (Tons) 30 25 20 15 10 5 0 35 40 45 5101520 Wheat (Tons) (a) United States(b) Brazil 12 18 8 4 A B

9. Copyright 2008 The McGraw-Hill Companies 35-9 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show The Economic Basis for Trade Specializing Based on Comparative Advantage –Principle of Comparative Advantage Terms of Trade –1W ≡ 1C in the U.S. (30 W or 30 C) –1W ≡ 2C in Brazil (10 W or 20 C) Gains from Trade-if each nation were to specialize each country would gain from trading Trading Possibility Line –Improved Options –Added Output

10. Copyright 2008 The McGraw-Hill Companies 35-10 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Gains from Trade Neither country should trade if they cannot gain more than they currently produce –US’s costs 1W=1C (US will want a higher price(more coffee) for wheat in world market) –Brazil’s costs 1W=2C (Brazil will want a higher price for coffee (more wheat) in world market) The exchange ration depends on world supply and demand for the two products –Graph reflects International terms 1W=1&1/2C

11. Copyright 2008 The McGraw-Hill Companies 35-11 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show The Economic Basis for Trade Coffee (Tons) 30 25 20 15 10 5 0 35 40 45 51015202530 Wheat (Tons) Coffee (Tons) 30 25 20 15 10 5 0 35 40 45 5101520 Wheat (Tons) (a) United States(b) Brazil 12 18 8 4 A B A’ B’ C C’ W c w w’ Trading Possibilities Line Trading Possibilities Line

12. Copyright 2008 The McGraw-Hill Companies 35-12 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Terms of Trade 1W=11/2C CountryOutput bf Specializ- ation Output after Amounts X- and M+ Output available after trade Gains from trade US18 wheat30 wheat-10 wheat20 wheat2 wheat 12 coffee0 coffee+15 coffee 15 coffee3 coffee Brazil8 wheat0 wheat+10 wheat 10 wheat2 wheat 4 coffee20 coffee -15 coffee5 coffee1 coffee

13. Copyright 2008 The McGraw-Hill Companies 35-13 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Supply and Demand Analysis of Exports and Imports World Price- –the price that equates the Qs and Qd globally Domestic Price- –Price that would prevail in a closed economy Supply and Demand in the United States –U.S. Export Supply Export Supply Curve –U.S. Import Demand Import Demand Curve

14. Copyright 2008 The McGraw-Hill Companies 35-14 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Supply and Demand Analysis of Exports and Imports Quantity Price 0 DdDd SdSd PdPd Q S d + Q PtPt PwPw abcd Economic Effects of a Protective Tariff or an Import Quota

15. Copyright 2008 The McGraw-Hill Companies 35-15 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Trade Barriers Revenue Tariff- –Tax applied to product not domestically produced, provides federal gov’t with modest revenue Protective Tariff- –Designed to shield domestic producers from foreign competition Import Quota –Maximum commodity that may be imported in any period of time Nontariff Barrier (NTB) –Licensing agreement that specifies unreasonable standards pertaining to quality & safety Voluntary Export Restriction (VER) –Foreign firms “voluntarily” limit their exports to a particular country. –Work like import quotas but agreed upon by exporters in hope avoid more stringent barriers

16. Copyright 2008 The McGraw-Hill Companies 35-16 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Economic Impact of Tariffs –Direct Effects Decline in Consumption- Increased Domestic Production Decline in Imports Tariff Revenue –Indirect Effect Purchase of fewer exports by trading country Fewer domestic goods demanded by trading country Loss of efficiency between countries –The comparative advantage –Release of resources to other production

17. Copyright 2008 The McGraw-Hill Companies 35-17 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Trade Barriers The Case for Protection: A Critical Review –Military Self-Sufficiency Argument –Diversification-for-Stability Argument –Infant Industry Argument Counterarguments Strategic Trade Policy –Protection-Against-Dumping Argument Dumping –Increased Domestic Employment Argument Smoot-Hawley Tariff Act –Cheap Foreign Labor Argument

18. Copyright 2008 The McGraw-Hill Companies 35-18 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Trade Adjustment Assistance Trade Adjustment Assistance Act of 2002 Offshoring The World Trade Organization (WTO) –The DOHA Round

19. Copyright 2008 The McGraw-Hill Companies 35-19 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show The WTO Protests Various Protest Groups Angrily Target WTO –Environmentalists, Socialists, Anarchists Labor Protections Environmental Standards Desire to Liberalize Trade Through Multilateral Negotiations International Labour Organization (ILO) Last Word

20. Copyright 2008 The McGraw-Hill Companies 35-20 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Key Terms labor-intensive goods land-intensive goods capital-intensive goods opportunity-cost ratio principle of comparative advantageprinciple of comparative advantage terms of trade trading possibilities line gains from trade world price domestic price export supply curve import demand curve equilibrium world price tariffs revenue tariff protective tariff import quota nontariff barrier (NTB) voluntary export restriction (VER)voluntary export restriction (VER) strategic trade policy dumping Smoot-Hawley Tariff Act Trade Adjustment Assistance ActTrade Adjustment Assistance Act offshoring World Trade Organization (WTOWorld Trade Organization (WTO Doha Round

21. Copyright 2008 The McGraw-Hill Companies 35-21 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Next Chapter Preview… Exchange Rates, the Balance of Payments, and Trade Deficits