Chapter 11 International Trade of Goods Introduction to Economics: Social Issues and Economic Thinking Wendy A. Stock PowerPoint Prepared by Z. Pan Chapter 11 International Trade of Goods Copyright © 2013 John Wiley & Sons, Inc. / Photo Credit: ©Lee Pettet/iStockphoto

After studying this chapter, 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 Describe the distribution of the costs and benefits from international trade Assess the arguments for and against limiting international trade Describe the costs, benefits, and mechanisms of limiting international trade Describe some of the forms of trade liberalization Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. International trade Exports – Goods or services produced domestically but sold abroad. Imports – Goods or services produced abroad but sold domestically. Trade surplus – When a country ’s level of exports exceeds its level of imports. Trade deficit – When a country ’s level of imports exceeds its level of exports. Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. World leading traders Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Top U.S. trade partners Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. WHY DO WE TRADE? 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. Copyright © 2013 John Wiley & Sons, Inc.

Production possibilities Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Absolute advantage 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. But, what about comparative advantage? Copyright © 2013 John Wiley & Sons, Inc.

Which has comparative advantage in what? Landia 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 = 0.15S Seavia 1S = 1,200/300 = 4C per day, or 1S = 4C 1C = 0.25S Copyright © 2013 John Wiley & Sons, Inc.

Which has comparative advantage in what? Because Seavia can produce shoes at a lower opportunity cost than Landia, Seavia has comparative advantage in producing shoes. Because the cost of producing a computer in Landia is lower than it is in Seavia, Landia has comparative advantage in producing computers. Landia will specialize in producing computers (total 3,000 computers and no shoes) and Seavia will specialize in producing shoes. (total 300,000 pairs of shoes and no computers) Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Terms of trade The Terms of Trade describes the price or rate of exchange of one good for another. 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. Which implies … Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Terms of trade For Computers: 0.15S < 1C < 0.25S For Shoes’: 4C < 1S < 6.67C e.g. 1C = 0.2S Or 1S = 5C Copyright © 2013 John Wiley & Sons, Inc.

Production and consumption possibilities Landia trades 1,000 computers to Seavia for 200 units of shoes Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Impact of exports Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Impact of imports Copyright © 2013 John Wiley & Sons, Inc.

Winners and losers from free trade Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. protectionism Protectionism is the limiting of free trade between countries by using tariffs, quotas, or other regulations. Copyright © 2013 John Wiley & Sons, Inc.

Arguments for protectionism Protecting Jobs National Security Differences in Environmental or Labor Policy Copyright © 2013 John Wiley & Sons, Inc.

Costs of protecting jobs Restricting imports does protect jobs in some industries However, protection comes at a very high cost for a large number of other consumers, households, and businesses in the economy Average cost per job saved from protecting industries from import competition is estimated at $231,289 per year 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. Copyright © 2013 John Wiley & Sons, Inc.

FORMS OF TRADE RESTRICTIONS Tariff – A tax on imported goods or services. Quota – A restriction on the quantity of imported goods or services in a country. Regulations - Technical or content requirements placed on imports as well as subsidies for domestically produced goods. Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Impact of tariff Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Impact of quota Copyright © 2013 John Wiley & Sons, Inc.

FORMS OF TRADE LIBERALIZATION Regional Trade Agreements – Agreements by countries in a region to reduce trade restrictions among themselves. (EU, NAFTA) 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. Copyright © 2013 John Wiley & Sons, Inc.

Questions/Discussions 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. Which country has absolute advantage in producing TVs? Which country has absolute advantage in producing computers? Which country has comparative advantage in producing TVs? Which country has comparative advantage in producing computers? Copyright © 2013 John Wiley & Sons, Inc.

Copyright © 2013 John Wiley & Sons, Inc. Key Concepts Exports Imports Trade surplus Trade deficit Terms of trade Protectionism Tariff Quota Regional trade agreements World Trade Organization Copyright © 2013 John Wiley & Sons, Inc.