Macro Chapter 18 Gaining from International Trade

6 Learning Goals 1)Realize the size and growth of trade for the United States 2)Explain why specialization and trade generate gains 3)Apply supply and demand analysis to international trade 4)Describe the kinds of trade barriers and their effects 5)Recognize reasons for implementing trade restrictions (on your own) 6)Clear up common misconceptions of international trade

The Trade Sector of the United States

The trade sector is a growing portion of GDP Imports Exports

Gains from Specialization and Trade

Comparative vs. Absolute Advantage: Comparative advantage reveals opportunity costs Absolute advantage does not; it simply means “who can produce more”

“Rules:” (1) Make and trade away the good for which you have a comparative advantage (2) Trade for (receive) the good for which you don’t have a comparative advantage

How do you know if you have a comparative advantage? You have a comparative advantage if you have a lower opportunity cost than someone else.

Supply, Demand, and International Trade

Graph of surplus:

Graph of shortage:

Who is helped/harmed? With exports: –US consumers pay a higher world price –Foreign consumers buy more products –US producers receive a higher world price –US producers sell more products With imports: –US consumers pay a lower world price –Foreign producers sell more products –US producers receive a lower world price –US producers sell fewer products With exports and imports: –The benefits outweigh the costs; a net gain exists

The Economics of Trade Restrictions

Main point: Generally, any trade restriction will reduce quantity, increase consumer prices, and create a deadweight loss (elimination of gains from trade). A tariff is a tax on imports (it raises the price so quantity demanded will fall); it reduces imports and generates revenue for the government A quota is a limit on the physical units that can be imported; it generates no revenue

Why Do Nations Adopt Trade Restrictions?

Make sure to read carefully Learning Goal 5: Recognize reasons for implementing trade restrictions (on your own)

Trade Barriers and Popular Trade Fallacies

Read this section very carefully on your own

A country cannot simultaneously reduce imports and increase exports for an extended period of time Imports Exports

Huge point (that most people don’t understand): Our imports give purchasing power to foreigners. They, in turn, purchase our exports. If we limited imports, we would limit the income of foreigners and they wouldn’t be able to buy as many of our exports. That’s why imports and exports are positively related

Here are more accurate statements about free trade: Free trade is harmful to some Americans but is helpful to America More people are helped by free trade than are hurt by free trade (i.e. America experiences a net gain)

Graph 1: Total employment has increased while exports and imports have increased Employment Imports Exports

Graph 2: The unemployment rate is inversely related to exports and imports Unemployment Rate Imports Exports

Graph 3: An increase in the trade sector has not caused inflation Inflation Rate Imports Exports

Graph 4: Per Capita Income has increased while both exports and imports have increased Per Capita Income Imports Exports