international trade. u.s. 2002 trade information exports: 1.0 trillion dollars 9.7 % of gdp imports:...

International Trade

U.S. 2002 Trade Informationexports: 1.0 trillion dollars 9.7 % of GDP

imports: 1.4 trillion dollars 13.7 % of GDP

Source: http://devdata.worldbank.org/external/CPProfile.asp?SelectedCountry=USA&CCODE=USA&CNAME=United+States&PTYPE=CP

When a country does not trade:

production possibilities = consumption possibilities.

This is not true when the country trades.

Example: Production Possibilities for the U.S. & Japan

Food and Computers

Production Possibilities for the U.S.

food computers

0 30

20 20

40 10

60 0

10 C cost 20 F

or 1C costs 2 F

Production Possibilities for the U.S.

food computers

0 30

20 20

40 10

60 0

10 C cost 20 F

or 1C costs 2 F

computers

food

Production Possibilities for the U.S.

food computers

0 30

20 20

40 10

60 0

10 C cost 20 F

or 1C costs 2 F

computers

food

60

45

30

15

0 15 30 45 60

Production Possibilities for the U.S.

food computers

0 30

20 20

40 10

60 0

10 C cost 20 F

or 1C costs 2 F

computers

food

60

45

30

15

0 15 30 45 60

Production Possibilities for Japan

food computers

0 45

10 30

20 15

30 0

15 C cost 10 F

or 1 C costs 2/3 F

Production Possibilities for Japan

food computers

0 45

10 30

20 15

30 0

15 C cost 10 F

or 1 C costs 2/3 F

computers

food

Production Possibilities for Japan

food computers

0 45

10 30

20 15

30 0

15 C cost 10 F

or 1 C costs 2/3 F

computers

food

60

45

30

15

0 15 30 45 60

Production Possibilities for Japan

food computers

0 45

10 30

20 15

30 0

15 C cost 10 F

or 1 C costs 2/3 F

computers

food

60

45

30

15

0 15 30 45 60

Trade Arrangement

Since 1 C costs 2 F in the U.S., and 1 C costs 2/3 F in Japan, 1 C will trade for between 2/3 F and 2 F.

Suppose they agree to trade 1C for 1 F.

Consumption Possibilities for the U.S.

computers

food

60

45

30

15

0 15 30 45 60

The consumption possibilities are now greater than the production possibilities.

consumption

production

Consumption Possibilities for Japan

computers

food

60

45

30

15

0 15 30 45 60

Again, theconsumption possibilities are greater than the production possibilities.

consumption

production

Natural Barriers to Trade

contracting costs negotiating costs transportation costs

Artificial Barriers to Trade

tariff: a tax on imported goods

quota: a limit on the quantity of a good that is imported

Free Trade

exchange of goods between countries without artificial barriers.

Benefits of Free Trade

Consumer Surplus

difference between the price paid and the amount the consumer is willing to pay.

P

Q

P*

the area under the demand curve and above the price

D

Producer Surplus difference between the amount the producer must receive

to be willing to provide the good and the price paid.

P

Q

P*

the area under the price and above the supply curve

S

Domestic Demand Curve (DD ): Demand for Cars by U.S. Consumers

quantity

price

DD

A

Domestic Supply Curve (SD ): Supply of Cars to U.S. Consumers by U.S. Producers

quantity

priceSD

DD

A

D

Without trade: price is OB and quantity is OI.

quantity

priceSD

DD

A

B

D

O

E

I

Without trade: consumer surplus is area ABE ...

quantity

priceSD

DD

A

B

D

O

E

I

... and producer surplus is area DBE.

quantity

priceSD

DD

A

B

D

O

E

I

Total Supply Curve (ST ): Supply of Cars to U.S. Consumers by All Producers

quantity

priceSD

DD

A

B

D

O

E

I

ST

With trade: price is OC and quantity purchased by U.S. consumers is OJ.

quantity

priceSD

DD

A

BC

D

O

E

I J

ST

G

The quantity sold by U.S. producers is OH and the quantity of imports is HJ.

quantity

priceSD

DD

A

BC

D

O

E

H I J

ST

GF

With trade: Consumer Surplus is area ACG

quantity

priceSD

DD

A

BC

D

O

E

H I J

ST

GF

Recall: Without trade, consumer surplus was area ABE.

quantity

priceSD

DD

A

BC

D

O

E

H I J

ST

GF

Consumers have gained area CBEG from trade.

Suppose we are viewing this issue from the perspective of the U.S. government.

Our concern is the welfare of U.S. consumers and U.S. producers (not foreign producers).

Domestic producer surplus is the area above the domestic supply curve and below the price.

With trade: (Domestic) Producer Surplus is area CDF

quantity

priceSD

DD

A

BC

D

O

E

H I J

ST

GF

Recall: Without trade, producer surplus was area DBE.

quantity

priceSD

DD

A

BC

D

O

E

H I J

ST

GF

Producers have lost area CBEF from trade.

So consumers have gained area CBEG and ...

quantity

priceSD

DD

A

BC

D

O

E

H I J

ST

GF

... producers have lost area CBEF.

quantity

priceSD

DD

A

BC

D

O

E

H I J

ST

GF

So for U.S. citizens, there is a net gain from trade of area EFG.

quantity

priceSD

DD

A

BC

D

O

E

H I J

ST

GF

Putting it all together:Relative to the no-trade situation,

when there is free trade,

the price paid by U.S. consumers is lower. the quantity purchased by U.S. consumers

is higher. there is a gain in consumer surplus. there is a loss of producer surplus. there is a net gain to U.S. citizens.

How do tariffs & quotas affect U.S. citizens?

Relative to the free trade situation, the price paid by U.S. consumers is higher. the quantity purchased by U.S. consumers

is lower. there is a loss of consumer surplus. there is a gain in producer surplus.