1. 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
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2. 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
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3. 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.
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World leading traders
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Top U.S. trade partners
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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.
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7. Production possibilities
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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?
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9. 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
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10. 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)
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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 …
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12. 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
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13. Production and consumption possibilities
Landia trades 1,000 computers to Seavia for 200 units of shoes
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Impact of exports
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Impact of imports
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16. Winners and losers from free trade
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protectionism
Protectionism is the limiting of free trade between countries by using tariffs, quotas, or other regulations.
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18. Arguments for protectionism
Protecting Jobs
National Security
Differences in Environmental or Labor Policy
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19. 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.
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20. 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.
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Impact of tariff
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Impact of quota
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23. 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.
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24. 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?
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Key Concepts
Exports
Imports
Trade surplus
Trade deficit
Terms of trade
Protectionism
Tariff
Quota
Regional trade agreements
World Trade Organization
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