1. International Trade
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. Principal U.S. exports include: Principal U.S. imports include:
Some Key Trade Facts
Principal U.S. exports include:
Principal U.S. imports include:
Chemicals
Agricultural products
Consumer durables
Semiconductors
Aircraft
U.S. provides about 8.5% of world’s exports
Petroleum
Automobiles
Metals
Household appliances
Computers
LO1
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3. Economic Basis for Trade
Nations have different resource endowments
Labor-intensive goods
Land-intensive goods
Capital-intensive goods
LO2
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4. Comparative Advantage
Assumptions
Two nations
Same size labor force
Constant costs in each country
Different costs between countries
U.S. absolute advantage in both
Opportunity cost ratio
Slope of the curve
Vegetables sacrificed per ton of beef
LO2
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5. Comparative Advantage
(a) United States
(b) Mexico
Vegetables (Tons) 30 25 20 15 10 5 35 40 45
Beef (Tons)
Vegetables (Tons) 30 25 20 15 10 5 35 40 45
Beef (Tons) 12 A 4 Z 18 8
LO2
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6. Comparative Advantage
LO2
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7. Comparative Advantage
Terms of trade
U.S. 1V = 1B
U.S. will sell 1B for more than 1V
Mexico 2V = 1B
Mexico will pay less than 2V for 1B
Settle between the two
Depends on supply/demand factors
Assume 1B = 1.5V
LO2
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8. Comparative Advantage
Gains from trade
Trading possibilities line
Slope equals terms of trade
Improved options
Complete specialization
More of both goods
More efficient resource allocation
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9. Trade Barriers and Export Subsidies
Tariffs
Revenue tariff
Protective tariff
Import quota
Nontariff barrier (NTB)
Voluntary export restriction (VER)
Export subsidy
LO4
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10. Economic Impact of Tariffs
Direct effects
Decline in consumption
Increase in domestic production
Decline in imports
Tariff revenue
Indirect effects
LO4
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11. Economic Impact of Quotas
Decline in consumption
Increase in domestic production
Decline in imports
Quotas do not provide for any government revenue but instead transfer it to foreign producers
LO4
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12. The Case for Protection
Military self-sufficiency
Diversification for stability
Infant industry
Protection against dumping
Increased domestic employment
Cheap foreign labor
LO5
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13. Equal, nondiscriminatory trade between member nations
GATT
Three principles:
Equal, nondiscriminatory trade between member nations
Reduction in tariffs
Elimination of import quotas
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14. Established by Uruguay Round of GATT 153 member nations in 2010
WTO
Established by Uruguay Round of GATT
153 member nations in 2010
Oversees trade agreements and rules on disputes
Critics argue that it may allow nations to circumvent environmental and worker-protection laws
LO5
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15. Initiated in 1958 as Common Market
European Union
Initiated in 1958 as Common Market
Abolished tariffs and import quotas between member nations
Established common tariff with nations outside the EU
Created Euro Zone with one currency
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16. Agreement between U.S., Canada, and Mexico
NAFTA
Agreement between U.S., Canada, and Mexico
Established a free trade zone between the countries
Trade has increased in all countries
Enhanced standard of living
LO5
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