Presentation on theme: "9 CHAPTER D YNAMIC P OWER P OINT S LIDES BY S OLINA L INDAHL International Trade."— Presentation transcript:
9 CHAPTER D YNAMIC P OWER P OINT S LIDES BY S OLINA L INDAHL International Trade
CHAPTER OUTLINE 2 Analyzing Trade with Supply and Demand The Costs of Protectionism Arguments against International Trade For applications, click herehere To Video To Video
Some good blogs and other sites to get the juices flowing: Food for Thought…. 3
B ACK TO Analyzing Trade with Supply and Demand We can use the demand and supply model to determine: The effects of free trade on: Domestic equilibrium price and quantity Imports The effects of trade barriers on: Domestic equilibrium price and quantity Imports
B ACK TO with free trade: World price prevails. Domestic consumption = Domestic production = Analyzing Trade with Supply and Demand Price Quantity of semiconductors P no trade Free trade equilibrium Domestic demand Domestic supply World supply World price No trade equilibrium Domestic production Domestic consumption Imports imports =
B ACK TO With Tariff: World price + tariff prevails. Domestic consumption= Domestic production = Analyzing Trade with Supply and Demand Price Quantity of semiconductors p no trade Domestic demand Domestic supply World supply + tariff World price + tariff Equilibrium with tariff Domestic production imports = World price World Supply tariff Domestic consumption Imports w/tariff tariff revenue Imports w/ free trade
A tariff results in a higher: I. consumer surplus. II. producer surplus. III. government revenue. a)I and II only b)II and III only c)I and III only d)I, II, and III
B ACK TO The Costs of Protectionism Protectionism Protectionism = policy of restraining trade through quotas, tariffs, or other regulations which burden foreign (but not domestic) producers. Tariff Tariff = a tax on imports Trade Quota Trade Quota = a restriction on the quantity of goods that can be imported: imports greater than the quota amount are forbidden (or heavily taxed.) 8
B ACK TO The Costs of Protectionism A tariff has two effects: 1. domestic production, domestic consumption. More of the good is produced by the higher-cost domestic producers. 2.Less is consumed lower gains from trade. Measuring the losses and wasted resources Can we measure the value of wasted resources? Yes!
B ACK TO The Costs of Protectionism Price per pound (in cents) Quantity (in billions of pounds) Domestic demand Domestic supply World supply + tariff World price Free trade equilibrium U. S. costs World costs Wasted resources World supply Lost gains from trade or deadweight loss Tariff equilibrium
B ACK TO The Costs of Protectionism Price per pound (in cents) Quantity (in billions of pounds) Domestic demand Domestic supply World supply + tariff World price $1.1 billion World supply Value of wasted resources = [(.20 –.09) x 20]/2 = $1.1 billion Lost gains from trade = [( ) x (24 – 20)]/2 = $.22 billion
B ACK TO The Costs of Protectionism Conclusions: A tariff reduces economic efficiency: Low-cost producers are prevented from selling. Mutually profitable gains from trade are prevented by law. U.S. consumers pay more, and workers in other countries (many of whom are poor) lose income.
A $1 tariff results in: a)An increase in imports of 80 million units. b)A decrease in imports of 80 million units. c)An increase in imports of 100 million units. d)A decrease in imports of 100 million units.
B ACK TO The Costs of Protectionism One final cost: lobbying The loss to domestic consumers is greater than the gains to domestic producers. Why does congress pass tariffs? Small number of producers Benefit per producer is high. Large number of consumers Loss per consumer is low.
B ACK TO Arguments Against International Trade Most Common Arguments 1.Trade reduces the number of jobs in the U.S. 2.Its wrong to trade with countries that use child labor. 3.We need to keep some industries for reasons of national security. 4.We need to keep some key industries because of beneficial spillovers onto other sectors. 5.We can increase U.S. well-being with strategic trade protectionism.
Which argument against trade is the strongest in your opinion? a)Trade reduces the number of jobs in the U.S. b)Its wrong to trade with countries that use child labor. c)We need to keep some industries for reasons of national security. d)We need to keep some key industries because of beneficial spillovers onto other sectors. e)We can increase U.S. well-being with strategic trade protectionism. B ACK TO
Rebuttals Trade and Jobs Tariffs raise the price of protected goods. Consumers have less money to spend on other goods. Jobs are lost in other industriesthese lost jobs are hard to see. Trade creates jobs The U.S. dollars we spend on other countrys good are often used to buy our goods. Jobs are created in U.S. exporting industries. 17
B ACK TO Rebuttals Child Labor Restricting imports made by child labor may do more harm than good. Children work out of necessitywhat else will they do? Often the alternative is worse. Prostitution Scrounging in refuse dumps Child labor is a poverty problem, not a trade problem. 18
B ACK TO Poverty and Child Labor Source: Edmonds, E. and N. Pavcnik, Child Labor in the global economy Journal of Economic Perspectives
B ACK TO Rebuttals Trade and National Security True: Some industries probably should be protected to protect National Security. BUT: This is subject to great abusealmost every industry can make this argument for protection. Examples: Vaccine production? probably a good idea. Angora Goat fleece?-- are you kidding? No. This is protected. iI think I am vital to your security. No kidding.
B ACK TO Rebuttals Key Industries Some industries are characterized by large spillovers to other industries (and should be encouraged). spillover Example: Computer chips have spillover benefits that go beyond the computer chip industry BUT: Subsidy (to chip makers) is a better option than a tariff. Tariff would be second-best. Hard to determine which industries are key.
B ACK TO Rebuttals Strategic Trade Protectionism Strategic Trade Protectionism = Government helps domestic firms act like a cartel when they sell to international buyers. May be able to grab up a larger share of the gains from trade than with free trade. This is done by forcing other countries to pay MORE for your goods, usually with an export tax. Will the exporting country see more revenue? Success depends on Price Elasticity of Demand. OPEC succeeds because oil has few substitutes. If the U.S. taxes car exports, it may just encourage foreigners to switch to a substitute good (Japanese cars, for instance).
B ACK TO At TEDIndia, TED favorite Hans Rosling gives another lively and humorous talk- and graphs global economic growth since He also predicts the exact date that India and China will outstrip the US. (15:50 minutes)
B ACK TO SEE THE INVISIBLE HAND 24 Globalization is not new Phoenicians: 1550 B.C. Traders Roman Empire: 753 B.C. Specialization and Trade Collapse of trade networks? 476 A.D. Dark Ages Revitalized trade routes? 1300s European Renaissance Periods of increased trade and the spread of ideas have been among the best for human progress.