2. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show INTERNATIONAL TRADE 20 C H A P T E R

3. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show Exports Have More Than Doubled as a Percent of GDP since 1975 $369 Billion Trade Deficit in 2000 Export Goods & Services 12% of American GDP KEY FACTS ON TRADE

4. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show United States Germany Japan France United Kingdom Canada Italy 0 2 4 6 8 10 12 GLOBAL PERSPECTIVE Shares of World Exports, Selected Nations, 1999 Source: World Trade Organization

5. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show ECOMOMIC BASIS FOR TRADE Distribution of Economic Resources Different Technologies and/or Resources Goods are Differentiated as to Quality and other Nonprice Attributes Labor-Intensive Goods Land-Intensive Goods Capital-Intensive Goods

6. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show COMPARATIVE ADVANTAGE Two Isolated Nations Constant Costs Straight Line PPF’s Different Costs Different Technology and Resources in Each Nation Cost Ratio Self-Sufficiency Output Mix Trading According to Comparative Advantage Graphically...

7. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show PRODUCTION POSSIBILITIES A B Coffee (tons) 45 40 35 30 25 20 15 10 5 0 30 25 20 15 10 5 0 5 10 15 20 25 30 5 10 15 20 Wheat (tons) Curve For Each Country United StatesBrazil

8. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show Total output will be greatest when Each good is produced by the nation that has the lowest domestic opportunity cost for that good. U.S has comparative advantage in wheat Brazil has comparative advantage in coffee Principle of Comparative Advantage PRODUCTION POSSIBILITIES

9. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show Terms of Trade Gains From Trade Improved Options Principle of Comparative Advantage PRODUCTION POSSIBILITIES Trading Possibilities Line Graphically…

10. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show TRADING POSSIBILITIES LINES Coffee (tons) 45 40 35 30 25 20 15 10 5 0 30 25 20 15 10 5 0 5 10 15 20 25 30 5 10 15 20 A B Trading possibilities line Trading possibilities line Wheat (tons) The Gains from Trade United StatesBrazil

11. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show TRADING POSSIBILITIES LINES Coffee (tons) 45 40 35 30 25 20 15 10 5 0 30 25 20 15 10 5 0 5 10 15 20 25 30 5 10 15 20 A B Trading possibilities line Trading possibilities line A’ B’ Wheat (tons) The Gains from Trade United StatesBrazil

12. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show TRADING POSSIBILITIES LINES Coffee (tons) 45 40 35 30 25 20 15 10 5 0 30 25 20 15 10 5 0 5 10 15 20 25 30 5 10 15 20 A B Trading possibilities line Trading possibilities line A’ B’ Wheat (tons) The Gains from Trade United StatesBrazil The Case For Free Trade

13. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand DdDd SdSd If the world price exceeds the U.S. price by 25 cents... $1.50 1.25 1.00.75.50.25 Price (per pound; U.S. dollars) 1005075125150 Quantity of Aluminum 10050 Price (per pound; U.S. dollars) $1.50 1.25 1.00.75.50.25 Quantity of Aluminum

14. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show EXPORTS = 50 U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $1.50 1.25 1.00.75.50.25 10050 DdDd Price (per pound; U.S. dollars) 1005075125150 SURPLUS = 50 $1.50 1.25 1.00.75.50.25 If the world price goes further up... SdSd Quantity of Aluminum

15. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show EXPORTS = 50 EXPORTS = 100 U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $1.50 1.25 1.00.75.50.25 10050 DdDd Price (per pound; U.S. dollars) 1005075125150 SURPLUS = 50 SURPLUS = 100 $1.50 1.25 1.00.75.50.25 If world prices fall below $1.00... SdSd U.S. export supply Quantity of Aluminum

16. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show SHORTAGE = 50 U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $1.50 1.25 1.00.75.50.25 10050 DdDd Price (per pound; U.S. dollars) 1005075125150 SURPLUS = 50 SURPLUS = 100 $1.50 1.25 1.00.75.50.25 SdSd EXPORTS = 50 EXPORTS = 100 IMPORTS = 50 U.S. export supply Quantity of Aluminum

17. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show SHORTAGE = 50 SHORTAGE = 100 U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $1.50 1.25 1.00.75.50.25 10050 DdDd Price (per pound; U.S. dollars) 1005075125150 SURPLUS = 50 SURPLUS = 100 U.S. export supply EXPORTS = 50 EXPORTS = 100 IMPORTS = 50 IMPORTS = 100 U.S. import demand $1.50 1.25 1.00.75.50.25 SdSd Quantity of Aluminum

18. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show CANADIAN EXPORT SUPPLY AND IMPORT DEMAND Canada’s Domestic Aluminum Market Canada’s Export Supply And Import Demand DdDd SHORTAGE = 50 $1.50 1.25 1.00.75.50.25 10050 Price (per pound; U.S. dollars) 1005075125150 SURPLUS = 100 Canadian export supply Canadian import demand $1.50 1.25 1.00.75.50.25 SdSd SURPLUS = 50 Quantity of Aluminum

19. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show EQUILIBRIUM WORLD PRICE AND QUANTITY OF EXPORTS & IMPORTS Price (per pound; U.S. dollars) U.S. export supply U.S. import demand Quantity of Aluminum Canadian export supply Canadian import demand 10050 $1.50 1.25 1.00.75.50.25 25.88 Equilibrium

20. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show TRADE BARRIERS Tariffs Revenue Tariff Protective Tariff Import Quota Nontariff Barrier (NTB) Voluntary Export Restriction (VER)

21. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show ECONOMIC IMPACT OF TARIFFS Direct Effects: Decline in Consumption Increased Domestic Production Decline in Imports Tariff Revenue Indirect Effects

22. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show ECONOMIC IMPACT OF TARIFFS Economic Impact of Quotas Net Costs of Tariffs and Quotas Impact On Income Distribution

23. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show THE CASE FOR PROTECTION Military Self-Sufficiency Increase Domestic Employment Job Creation From Imports Fallacy of Composition Retaliation Smoot-Hawley Act of 1930 Long-run feedbacks Diversification-For-Stability Infant-Industry Argument Strategic Trade Policy Protection-Against-Dumping Cheap Foreign Labor

24. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show World Trade Organization (WTO) Reductions in Tariffs Worldwide New Rules to Promote Trade in Services Reduction in Agricultural Subsidies Intellectual Property Protections Phasing Out Textile Quotas and Tariffs THE WORLD TRADE ORGANIZATION

25. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show World Trade Organization (WTO) Reductions in Tariffs Worldwide New Rules to Promote Trade in Services Reduction in Agricultural Subsidies Intellectual Property Protections Phasing Out Textile Quotas and Tariffs THE WORLD TRADE ORGANIZATION Chapter Conclusions

26. export supply curve import demand curve equilibrium world price tariffs revenue tariff protective tariff import quota nontariff barrier (NTB) voluntary export restriction (VER) strategic trade policy dumping World Trade Organization (WTO) labor-intensive goods land-intensive goods capital-intensive goods cost ratio principle of comparative advantage terms of trade trading possibilities line gains from trade world price domestic price ENDBACK Copyright McGraw-Hill/Irwin 2002

27. Copyright McGraw-Hill/Irwin, 2002 Key Facts of Trade Economic Basis For Trade Comparative Advantage Production Possibilities Trading Possibilities Lines Equilibrium World Price and Quantity of Exports and Imports Trade Barriers Economic Impact of Tariffs The Case for Protection The World Trade Organization Key Terms Previous Slide Next Slide End Show EXCHANGE RATES THE BALANCE OF PAYMENTS, AND TRADE DEFICITS Chapter 21 Coming soon...