“in every country it always is and must be the interest of the great body of the people to buy...
TRANSCRIPT
““In every country it always is and In every country it always is and must be the interest of the great must be the interest of the great
body of the people to buy whatever body of the people to buy whatever they want of those who sell it they want of those who sell it
cheapest.”cheapest.”The reason for trade . . . .The reason for trade . . . .
From the From the Wealth of NationsWealth of Nations written in 1776 by written in 1776 by
Adam Smith, Adam Smith, Father of Classical Father of Classical Economic ThoughtEconomic Thought
KEY FACTS
1-Exports of Goods & Services account for 11%2-Since 1975, US exports have doubled as a % of GDP3-US is the leader in volume of exports & imports in dollar value4-import and export same categories of items like cars, computers, chemicals etc5-US provides 1/8 of the world’s exports
Germany, Japan, France, UK, and China
Could We Build a Jet Liner Without Could We Build a Jet Liner Without World Trade?World Trade?
United States
GermanyJapan
FranceUnited
KingdomChina
CanadaItaly
0 2 4 6 8 10 12
Shares of World Exports, Selected Nations, 2001
Source: World Trade Organization
WHY TRADE?
1-uneven distribution of natural resources2-efficient production of goods requires different technologies & combinations of resources3-produce items that differ in qualityRESULTS OF TRADE:A-specialize, increase productivity & get more G & S
BENEFITS OF FREE TRADE
More efficient allocation of resourcesAllows for higher level of material wealthPromotes competition & innovationConsumer choices increaseDeters monopoliesEconomic partner=political partner
3 Types of Goods
1-labor intensiveNeed skilled labor
2-land intensiveNeed land & climate
3-capital intensiveNeed $ and machines
Distribution of resources changes over time if have more education, more technology etc.
Brazil & US—a simplified study of trade
Constant costs not increasingCost ratioSelf-sufficient output mixComparative advantageTerms of trade
Gains from trade
Supplement your domestic ppc with a trading possibility lineImproved optionsRealize combination of the 2 goods beyond ppc
More efficient allocation of world resources and larger outputs
Using an increasing cost ppc
Resources not perfectly substitutableHave to give up more & more of one product to get another
Result: less than complete specialization
Production Possibilities CurvesProduction Possibilities Curves
A
B
Cof
fee
(ton
s)
Cof
fee
(ton
s)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
Wheat (tons) Wheat (tons)
United StatesUnited States BrazilBrazil
Country Outputs before Specialization
USA 18 wheat 12 coffee
BRAZIL 8 wheat 4 coffee
SpecializationSpecializationSpecializationSpecialization
Country Outputs before Specialization
Outputs after Specialization
USA 18 wheat 30 wheat 12 coffee 0 coffee
BRAZIL 8 wheat 0 wheat 4 coffee 20 coffee
If the US and Brazil specialize in the If the US and Brazil specialize in the good in which they hold the good in which they hold the Comparative Advantage…Comparative Advantage…
TRADING POSSIBILITIES LINES
Co
ffee
(to
ns)
Co
ffee
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
A
B
Tradingpossibilities line
Tradingpossibilities line
Wheat (tons) Wheat (tons)
The Gains from TradeUnited States Brazil
TRADING POSSIBILITIES LINES
Co
ffee
(to
ns)
Co
ffee
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
A
B
Tradingpossibilities line
Tradingpossibilities line
A’
B’
Wheat (tons) Wheat (tons)
The Gains from TradeUnited States Brazil
WORLD TRADE ANALYSIS
WHO BENEFITS?Consumers can buy more & different products at a lower priceDomestic industries
Export industries
WHO IS HURT?Import competing firmsDomestic consumers of export industriesMobility of capital & workers
Supply & Demand Analysis
Domestic priceWorld priceUS export supply
if above equilibrium, then ______if below equilibrium, then
US Import demandIf below domestic price, importIf above domestic price, don’t
SUPPLY AND DEMANDIN THE UNITED STATES
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
Dd
Sd
If the world priceexceeds the U.S.
price by 25 cents...
$1.50
1.25
1.00
.75
.50
.25Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150Quantity of Aluminum
10050P
rice
(p
er p
ou
nd
; U
.S. d
olla
rs)
$1.50
1.25
1.00
.75
.50
.25
Quantity of Aluminum
EXPORTS = 50
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
$1.50
1.25
1.00
.75
.50
.25
If the world pricegoes further up...
Sd
Quantity of Aluminum Quantity of Aluminum
SUPPLY AND DEMANDIN THE UNITED STATES
EXPORTS = 50
EXPORTS = 100
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
SURPLUS = 100 $1.50
1.25
1.00
.75
.50
.25
If world pricesfall below $1.00...
Sd
U.S.exportsupply
Quantity of Aluminum Quantity of Aluminum
SUPPLY AND DEMANDIN THE UNITED STATES
SHORTAGE = 50
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
SURPLUS = 100 $1.50
1.25
1.00
.75
.50
.25
Sd
EXPORTS = 50
EXPORTS = 100
IMPORTS = 50
U.S.exportsupply
Quantity of Aluminum Quantity of Aluminum
SUPPLY AND DEMANDIN THE UNITED STATES
SHORTAGE = 50
SHORTAGE = 100
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
SURPLUS = 100
U.S.exportsupply
EXPORTS = 50
EXPORTS = 100
IMPORTS = 50
IMPORTS = 100
U.S.import
demand
$1.50
1.25
1.00
.75
.50
.25
Sd
Quantity of Aluminum Quantity of Aluminum
SUPPLY AND DEMANDIN THE UNITED STATES
Canada’s DomesticAluminum Market
Canada’s Export SupplyAnd Import Demand
DdSHORTAGE = 50
$1.50
1.25
1.00
.75
.50
.25
10050
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 100
Canadianexportsupply
Canadianimport
demand
$1.50
1.25
1.00
.75
.50
.25
Sd
SURPLUS = 50
Quantity of Aluminum Quantity of Aluminum
SUPPLY AND DEMANDIN THE CANADA
TRADE RESTRICTIONS . . . .
Tariffs-excise tax on imports2 types: revenue & protective
QuotasNon-tariff barriers—licensing agreementsVoluntary export restrictions
Great BritainGreat BritainLipton TeaLipton TeaSwedenSwedenVolvoVolvo
NetherlandsNetherlandsShell gasolineShell gasolineThailandThailandBumble Bee TunaBumble Bee Tuna
Great BritainGreat BritainRagu FoodsRagu FoodsFranceFranceMichelin TiresMichelin Tires
GermanyGermanyAlka-Seltzer Alka-Seltzer United StatesUnited StatesLevi Strauss Levi Strauss
clothingclothing
GermanyGermanyAdidas athletic Adidas athletic
wearwearUnited StatesUnited StatesNike athletic wearNike athletic wear
GermanyGermanyBayer AspirinBayer AspirinJapanJapanFirestone tiresFirestone tires
JapanJapanSony Sony
electronicselectronicsGreat BritainGreat Britain
Baskin-Robbins Baskin-Robbins ice creamice cream
AustraliaAustraliaTV GuideTV GuideSwitzerlandSwitzerlandNestleNestle
Home Home CountryCountryHome Home
CountryCountryProductProductProductProductHome Home CountryCountryHome Home
CountryCountryProductProductProductProduct
Where in the world?Where in the world?
TariffsTariffs… … are import are import duties or duties or surcharges surcharges on the price on the price of imports. of imports.
The tariff:The tariff:raises the price of the raises the price of the import import reduces the demand for reduces the demand for imports imports encourages demand for encourages demand for home-produced substitutes home-produced substitutes raises revenue for the raises revenue for the government. government.
Effects of a TariffEffects of a Tariff
TRADE RESTRICTION #2-Quota
……restrict the actual quantity of restrict the actual quantity of an import allowed into a an import allowed into a country. country.
A quota: A quota: raises the price of imports; raises the price of imports; reduces the volume of reduces the volume of
imports; imports; encourages demand for encourages demand for
domestically made substitutes.domestically made substitutes.
Effects of a QuotaEffects of a Quota
Impact of Tariffs
DirectSubstitution affect—Increase of domestic productionDecrease in importsTariff revenue increases
Indirect Changes resource allocationPromotes inefficient industries
Impact of Quotas
Higher price created that goes to foreign producer
Prices increase b/c less imports(increased demand, but limited supply)
Domestic consumption decreasesUS producers get a higher price and increase sales
AFFECT ON CONSUMER
1-high price for import2-higher prices for domestic good
Less competition
3-diversion of $ & resources to influencing Congress, when $ could be used for other items
Arguments For Protectionism
1-preserve industries necessary for effective military2-increased domestic employment3-diverse economy can withstand international political/economic problems better4-protects infant industry5-tariffs protect firms from dumping “below cost” items into market6-cheap foreign labor hurts American laborers
PROBLEMS WITH PROTECTIONISM ARGUMENTS
Jobs are created thru importsALL nations can’t restrict imports while maintaining exportsTrade barrier wars would hurt allThru imports foreign nations earn $ to buy exportsUS has a diverse economy—unchangeable
More Problems with Protectionism Arguments
Use direct subsidies not tariffs to help infant industriesMost nations prohibit dumping of goodsUsually have slower growth in developing nations if they use protectionism