1. INTRODUCTION TO ECONOMICS Beata Łopaciuk-Gonczaryk
Lecture 11 International Trade

2. Outline Facts of International Trade The Economic Basis for Trade
The Principle of Comparative Advantage
Trade Barriers
The Case for Protection: A Critical Review
The World Trade Organization

3. Facts of International Trade: Highlights
Exports as a share of total output
Trade deficit
Free trade agreements (EU, NAFTA, etc.)
Improved transportation and communication has contributed to international trade since WWII.
U.S., Japan, Western Europe and China dominate world trade,
but substantial international trade form South Korea, Taiwan, and Singapore.

4. Shares of World Exports, 2001
GLOBAL PERSPECTIVE
Shares of World Exports, 2001
United States
Germany
Japan
France
United Kingdom
China
Canada
Italy
Source: World Trade Organization

5. Shares of World Exports, 2009
GLOBAL PERSPECTIVE
Shares of World Exports, 2009
Source: World Trade Organization,

6. The Economic Basis for Trade
The rationale for trade:
uneven distribution of economic resources among nations
efficient production of various goods requires different technologies or combinations of resources
products are differentiated among nations and some people prefer imported goods

7. The Economic Basis for Trade
Examples:
Japan:
has a large, well‑educated labor force
can specialize in labor‑intensive commodities
Australia:
has an abundance of land relative to human and capital resources and
can cheaply produce land‑intensive agricultural products
Industrially advanced nations:
are in a position to produce capital‑intensive goods.

8. Production Possibilities Curve For Each Country
United States
Brazil
Coffee (tons) 45 40 35 30 25 20 15 10 5
Wheat (tons)
constant cost industries
(18, 12) A
(8, 4) B

9. Comparative Advantage
Differing opportunity costs of producing various goods and services
Total output will be greatest when each good is produced by the nation that has the lowest opportunity cost for that good
Example
U.S has comparative advantage in wheat and Brazil has comparative advantage in coffee
after specialization there will be more coffee and more wheat in total than the totals before specialization

10. Comparative Advantage
Terms of trade
The rate at which units of one product can be exchanged for units of another product
The amount of one good or service that must be given up to obtain 1 unit of another good or service
in the U.S. 1 wheat = 1 coffee
in Brazil 1 wheat = 2 coffee, so Brazil will not trade more than 2 coffee for 1 wheat.
the rate of exchange will be somewhere between 1 and 2 coffees for each wheat
The actual TOT - country’s negotiating power and world demand and supply conditions.

11. Trading Possibilities Lines – the Gains From Trade
United States
Brazil 45 40 35 30 25 20 15 10 5
If the U.S. chooses to trade 10 tons of wheat for 15 tons of coffee
Trading
possibilities line 30 25 20 15 10 5
Coffee (tons)
Coffee (tons)
Trading
possibilities line A B
Wheat (tons)
Wheat (tons)

12. Trading Possibilities Lines – the Gains From Trade
United States
Brazil 45 40 35 30 25 20 15 10 5
Trading
possibilities line 30 25 20 15 10 5
Coffee (tons)
Coffee (tons)
Trading
possibilities line
A’ (20,15) A
B’ (10, 5) B
Wheat (tons)
Wheat (tons)

13. Comparative Advantage
The gains from trade
Improved productivity of resources
Added output
Remark
In reality increasing costs
Complete specialization will probably not occur with many products

14. Comparative Advantage
Through free trade, based on the principle of comparative advantage, the world economy can achieve a more efficient allocation of resources and a higher level of material well‑being
Free trade:
promotes competition and deters monopoly power
specialization increases the production possibility curve by raising the productivity of the resources devoted to producing certain goods

15. Trade Barriers Types of barriers: Tariffs Import quotas
taxes raising import prices
Import quotas
maximum amounts of imports allowed
Nontariff barriers
licensing requirements, unreasonable standards, or bureaucratic red tape in customs procedures
Voluntary export restrictions
agreements by foreign firms to “voluntarily” limit their exports to a particular country

16. Economic Impact of Tariff or Quota
Source: McConell and Brue 2005

17. Economic Impact of Tariffs
Direct effects when tariff is imposed:
Domestic consumption declines as the price rises to Pt
Domestic production rises because the price has risen
Imports fall
Government tariff revenue represents a transfer of income from consumers to government
Indirect effect
Relatively inefficient industries are expanding
Relatively efficient industries abroad have been made to contract

18. Economic Impact of Quotas
Similar to tariffs, but
No revenue is generated for the government
Price rises to pt as with the tariff, but
Revenue generated by the higher price goes to foreign and domestic producers
No possibility for consumers to obtain more than the allowed quota
Even at higher prices

19. The Case for Protection
Military self‑sufficiency
National defense argument but
It is difficult to select strategic industries to protect
Increasing domestic employment
Imports may eliminate some jobs, but they create others in the sales and service industries for these products
The trading partner may be made weaker and less able to buy the protectionist nation’s products
Trade wars

20. The Case for Protection
Diversification for stability
protecting certain industries until they become viable
does not apply to diversified economies
economic costs of diversification may be great and not worth the protection
The infant‑industry argument
new industries may need “temporary” protection to gain productive efficiency but
difficult to determine which industries
protection may persist
direct subsidies may be preferable to international protection
Viable = profitable

21. The Case for Protection
Protection against “dumping”
the below‑cost sales - a form of price discrimination
antidumping duties (tariffs)
Protection against competition from cheap foreign labor
not valid
it is mutually beneficial for rich and poor to trade with one another
The infant‑industry argument and the military self‑sufficiency argument may be justifiable on political grounds

22. World Trade Organization
Inefficiencies of protectionism - seeking ways to promote free trade
World Trade Organization
GATT ( )
153 nations
China from 2001
Poland from 1995
oversees provisions of agreement and resolves disputes
a protest target of groups who are against various aspects of globalization

23. Key Terms 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
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)