1. International Trade Patterns and Trends in International Trade
Gains from trade
Absolute and comparative advantage revisited
Tariffs
Quotas
Welfare loss from trade restrictions
Arguments for trade restrictions

2. Source:

3. Foreign sector as a percent of GDP has grown

4. The U.S. trade deficit

6. Composition of U.S. Imports and Exports
Composition of US merchandise exports and imports in 2006

7. U. S. production as a percentage of U. S
U.S. production as a percentage of U.S. consumption for various commodities
Percent
If U.S. production is <100% of consumption, imports make up the difference.
If U.S. production exceeds U.S. consumption, then the difference is exported.

9. Win-win?
Ricardo’s principle of comparative advantage shows how trade between nations can be mutually beneficial

10. Production possibilities for United States and Izodia
(a) United States
Production possibilities with 100 million workers
(millions of units per day) U1 U2 U3 U4 U5 U6
Food
Clothing
600
480 60
360
120
240
180
300
(b) Izodia
Production possibilities with 200 million workers I1 I2 I3 I4 I5 I6
200
160 80 40
320
400

11. Production possibilities frontiers for the United States and Izodia without trade (millions of units per day)
(a) United States
(b) Izodia
100
200
300
400
500
600
Food
100
200
300
400
500
600
Food U1 U2 U3 U4 I1 I2 U5 I3 I4 I5 U6 I6
100
200
300
400
Clothing
100
200
300
400
Clothing
Slope: opportunity cost of an additional unit of food is ½ unit of clothing
An additional unit of food costs 2 units of clothing.
Food is produced at a lower opportunity cost in the United States.

12. Comparative advantage
Measuring opportunity cost:
For the United States
Food: 60 clothing/120 food = ½ clothing per food.
Clothing: 120 food/60 clothing = 2 food per clothing For Izodia
Food: 80 clothing/40food = 2 clothing per food
Clothing: 40 food/80 clothing = ½ food per clothing
Thus the Unites States has the comparative advantage in food and Izodia has the comparative advantage in clothing.

13. Terms of trade
How much of one good exchanges for a unit of another good.
As long as the Americans can get more than ½ unit of clothing for each unit of food , and as long as the Izodians can get more than ½ unit of food for a unit of clothing, both sides benefit from specialization and trade

14. 1 unit of clothing = 1 unit of food
These terms work for both sides

15. Production (and consumption) possibility frontiers with trade (millions of units per day)
(a) United States
(b) Izodia
100
200
300
400
500
600
Food
100
200
300
400
500
600
Food U U4 I I3
100
200
300
400
Clothing
100
200
300
400
Clothing
Trade: 1 unit of clothing for 1 unit of food. Both countries are better off as a result of international trade.

16. Gains from trade United States Izodia Clothing (units) Food (units)
No Trade
180
240
160
120
Trade
200
400
Gain 20 40 80

17. Trade restrictions
Trade embargos: Prohibitions on the importation (or exportation) of goods and services. Examples: 1973 Oil embargo, trade embargo with Iraq, embargo on imported sugar from Cuba.
Tariffs: Taxes imposed on imported goods.
Quotas: Limits on the quantity or value of goods or services that can be imported or exported. Examples: The textile quota, the sugar quota, export quota on raw timber.
Subsidies: payments by government to exporters. These stimulate trade by allowing the exporter to charge a lower price.

18. Non-tariff trade barriers
Health and safety standards—such as European ban on genetically-modified soybeans and hormone-treated beef.
Product design standards
Licensing requirements
Bureaucratic red tape
The Japanese trade ministry (MITI) decided that snow skis made in the U.S. were not safe enough for Japanese ski enthusiasts

19. Consumer and producer surplus from market exchange
$0.50
0.25
Price per pound
D = marginal benefit
Consumer
surplus
S = marginal cost
Producer
surplus 60
Chicken
(pounds per day)

20. Effect of a tariff
At a world P=$0.10 per pound, US consumers demand 70 mill. pounds of sugar per month, and US producers supply 20 mill. pounds per month; the difference is imported.
$0.15
0.10
per pound
Price S D
Tariff= $0.05 per pound; P=$0.15 per pound.
US producers increase production to 30 mill. pounds; US consumers cut back to 60 mill. pounds. Imports fall to 30 mill. pounds. a c b d
a = increase in producer surplus f
c = government revenue from the tariff 30
Sugar millions of
pounds per month) 20 60 70
b = higher marginal cost of domestically producing sugar that could have been produced more cheaply abroad.
d = loss of consumer surplus from the drop in consumption
Consumers are worse off. Loss of consumer surplus: areas a, b, c, and d.
b+d = Net welfare loss to the US economy

21. Effect of a quota $0.15 0.10 per pound Price S $0.15 0.10 per poundb d
Sugar
(millions of pounds per month) 20 50 70 30
Sugar
(millions of pounds per month) 20 60 70
Quota=30 mill., world price=$0.10. S’=supply curve (imports and US production; new price $0.15: intersection of D and S’.
Loss of consumer surplus: a+b+c+d;
a = transfer from US consumers to US producers;
b+d = net loss; c = gain for sellers of foreign-grown sugar

22. Trade restrictions are welfare-reducing
Given the preceding analysis , why are trade restrictions so pervasive?

23. Arguments for trade restrictions
National security
Save domestic jobs
Anti-dumping
Infant industry