1. 37 International Trade McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Some Key Trade Facts LO1 Principal U.S. exports include: Principal U.S. imports include: Chemicals Agricultural products Consumer durables Semiconductors Aircraft U.S. provides about 8.5% of worlds exports Petroleum Automobiles Metals Household appliances Computers 37-2

3. Economic Basis for Trade Nations have different resource endowments Labor-intensive goods Land-intensive goods Capital-intensive goods LO2 37-3

4. 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 Vegetables sacrificed per ton of beef LO2 Comparative Advantage 37-4

5. Vegetables (Tons) 30 25 20 15 10 5 0 35 40 45 5101520 Beef (Tons) Vegetables (Tons) 30 25 20 15 10 5 0 35 40 45 51015202530 Beef (Tons) (a) United States (b) Mexico 12 18 8 4 A Z Comparative Advantage LO2 37-5

6. Comparative Advantage LO2 37-6

7. Comparative Advantage Terms of trade U.S. 1V = 1B U.S. will sell 1B for more than 1V Mexico 2V = 1B Mexico will pay less than 2V for 1B Settle between the two Depends on supply/demand factors Assume 1B = 1.5V LO2 37-7

8. 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 LO2 37-8

9. Trade Barriers and Export Subsidies Tariffs Revenue tariff Protective tariff Import quota Nontariff barrier (NTB) Voluntary export restriction (VER) Export subsidy LO4 37-9

10. Economic Impact of Tariffs Direct effects Decline in consumption Increase in domestic production Decline in imports Tariff revenue Indirect effects LO4 37-10

11. Economic Impact of Quotas Decline in consumption Increase in domestic production Decline in imports Quotas do not provide for any government revenue but instead transfer it to foreign producers LO4 37-11

12. The Case for Protection Military self-sufficiency Diversification for stability Infant industry Protection against dumping Increased domestic employment Cheap foreign labor LO5 37-12

13. GATT Three principles: Equal, nondiscriminatory trade between member nations Reduction in tariffs Elimination of import quotas LO5 37-13

14. WTO Established by Uruguay Round of GATT 153 member nations in 2010 Oversees trade agreements and rules on disputes Critics argue that it may allow nations to circumvent environmental and worker-protection laws LO5 37-14

15. 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 LO5 37-15

16. NAFTA 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 LO5 37-16