Ch. 17-The Global Economy: TRADE Sara Susach

IMPORTANCE OF INTERNATIONAL TRADE It is part of our everyday life. Many of the products we consume (food, clothes, cars, etc.) come from outside the USA.

U.S. PARTICIPATION IN WORLD TRADE US exports and imports have increased a lot over the past 4 decades. From 1960 to 2001: Exports: $25 billion $1034 billion Imports: $23 billion$1383 billion This is proof of the fact that the US economy has become increasingly internationalized.

TRADE DEFICIT 1960 to 1976 US exports and imports were almost equal. From 1976 to the present day, US has had a trade deficitimports > exports.

PEOPLE VS. ECONOMISTS For people: -Exports = source of jobs -Imports = loss of jobs So: trade deficit = evidence that intl. trade destroys more jobs than it creates -Because of this, people want restrictions on trade to protect US workforce. For economists: -Intl. trade is beneficial because: 1. It makes both countries better off (comparative advantage). 2. Consumers will pay lower prices, and this consumer gain will exceed the losses to workers.

COMPARATIVE ADVANTAGE AND INTERNATIONAL TRADE A country has a comparative advantage in a good if it can produce that good at a lower opt. cost than its trading partner. Countries gain by producing the goods on which they have a comparative advantage, and exchanging them for other goods in which they don’t have a comparative advantage. This is what makes trade between two countries possible and beneficial for both.

GAINS FROM INTL. TRADE Goods and services are imported if the price for consumers will be lower than the domestic price. So: although imports create losses for workers (lose jobs) and producers (sell at lower price to compete), they also create gains for consumers. Also: gains to consumers > losses to workers and producers.

If no imports, market equilibrium: Qb and Pb -Gains to consumer: A -Gains to producer: B+C With trade, P to Pa, consumers buy Qc (Qd from domestic supply and Qc-Qd from imports) -Increase in gains to consumers: B+D -Decrease in gains to producer: B This creates a net gain from trade equal to area D [(B+D)- B] US Supply US Demand Trading country Price 0 Pb Qd Qb Qc Pa A B C D IMPORTS Quantity Price

BARRIERS TO INTL. TRADE Tariffs: -A tax charged on a good when it crosses a country’s border. -A tax charged on a good when it crosses a country’s border. -Makes the P of the good risedomestic producers get higher P and produce more. -Makes the P of the good risedomestic producers get higher P and produce more. Good for producers – get more $ for goods Bad for consumers – pay more $ for goods -Increase in tax revenue – good for government. -Increase in tax revenue – good for government.Quotas: -Set a max. amount of a good that can be imported. -Set a max. amount of a good that can be imported. -Results on increase in P of the good. -Results on increase in P of the good. Good for producers – get more $ for goods Bad for consumers – pay more $ for goods Voluntary Export Restraints: -Exporting nations agree to limit the amounts of goods shipped to importing nations. -Exporting nations agree to limit the amounts of goods shipped to importing nations. -Increases price of the goods subjected to this agreement. -Increases price of the goods subjected to this agreement.

BARRIERS TO INTL. TRADE Although domestic producers benefit from tariffs, quotas and VER’s, society as a whole is worse off, because these trade restrictions shift resources from industries that have a comparative advantage (foreign) to those that have a comparative disadvantage (domestic). Result: Reduction in the nation’s standard of living.

ARGUMENTS FOR FREE TRADE Decreasing costs -With intl. trade, markets become larger, firms can produce more. Large-scale production reduces average cost of production (cost per unit of good). Increased Competition -Domestic firms need to lower their prices to compete with foreign firms that can produce at lower costs (ex. Car industry US - Japan). Diversity of products -Increase the variety of products available to consumers.

ARGUMENTS FOR RESTRICTING FREE TRADE Infant industry argument: -Protect newly-created industries from competition with already established foreign industries. National Defense: -Protect industries that manufacture goods key to national security (steel, oil, military hardware, etc.). Save American jobs: -Foreign competition can reduce domestic output, which will result in the loss of domestic jobs.

REDUCING TRADE BARRIERS Since WWII barriers to intl. trade have been significantly reduced, through two approaches: 1. Globally: -Global trade negotiations, conducted under the General Agreement on Tariffs and Trade. -Global trade negotiations, conducted under the General Agreement on Tariffs and Trade. 2. Regionally: -Many countries have formed regional trading blocs. -Many countries have formed regional trading blocs.Examples: -North American Free Trade Agreement (NAFTA) -European Union