Econ789 chapter038
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Transcript of Econ789 chapter038
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International Trade
Chapter 38
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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38-2
Global Economy
• Households and firms in the U.S. economy interact with households and firms in other economies in two main ways:
• International Trade: They buy and sell goods and services.
• International Finance: They borrow and lend.
LO1
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38-3
Global Economy
• Households and firms in the U.S. economy interact with those in the rest of the world in goods markets and financial markets.
LO1
• The red flow shows the expenditure by Americans on imports of goods and services.
• The blue flow shows the expenditure by the rest of the world on U.S. exports (other countries’ imports).
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38-4
Global Economy
• The green flow shows U.S. lending to the rest of the world.
• The orange flow shows U.S. borrowing from the rest of the world
LO1
• These international trade and international finance flows tie nations together.
• Global booms and slumps are transmitted through these flows.
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38-5
U.S. Trade Facts
• U.S. exports and imports as shares of gross domestic product have been on a long-term upward trend.
• International trade has roughly tripled in importance compared to the economy as a whole in the past 50 years.
• Both imports and exports fell in 2009 due to the recession.
LO1
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38-6
U.S. Trade Facts
• Exports and Imports as a Percentage of U.S. GDP
LO1
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38-7
U.S. Trade Facts
• Compared to the United States, other countries are even more tied to international trade.
• Their imports and exports as a share of GDP are substantially higher.
• The United States, due to its size and diversity of resources, relies less on international trade than almost any other country.
LO1
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38-8
U.S. Trade Facts
LO1
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38-9
U.S. Trade Facts
• In 2013, the world as a whole produced goods and services worth about $74 trillion at current price.
• World trade in goods and services exceeded $23 trillion in 2013.
• More than 30% of world output is sold across national borders.
• So, who trades with whom? In particular, whom does the U.S. trade with?
LO1
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38-10
U.S. Trade Facts
LO1
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38-11
U.S. Trade Facts
• The 5 largest trading partners with the U.S. in 2012 were Canada, China, Mexico, Japan, and Germany.
• The largest 15 trading partners with the U.S. accounted for 69% of the value of U.S. trade in 2012.
• 3 of the top 10 trading partners with the U.S. in 2012 were also the 3 largest European economies: Germany, the United Kingdom, and France.
LO1
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38-12
U.S. Trade Facts
• Total U.S. Trade with Major Partners, 2012
LO1
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38-13
U.S. Trade Facts
• Principal U.S. exports include:• Chemicals• Agricultural products• Consumer durables• Semiconductors• Aircraft
LO1
• Principal U.S. imports include:• Petroleum• Automobiles• Metals• Household appliances• Computers
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38-14
U.S. Trade Facts
• Trade surplus when exports exceed imports• Trade deficits when imports exceeds exports• U.S. trade deficit in goods • $735 billion in 2012
• U.S. trade surplus in services • $196 billion in 2012
• Trade deficit with China• $315 billion in 2012
LO1
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38-15
Specialization and Trade
• Specialization: People concentrate on what they are good at.
• Division of Labor: Breaking up a task into a number of smaller, more specialized tasks.
• Specialization through division of labor leads to greater production of goods and services without increasing inputs.
LO2
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38-16
Specialization and Trade
• Mutual Gains from Voluntary Exchange: A voluntary exchange between two parties must make both parties better off.
LO2
Before Exchange
After Exchange
Exchange
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38-17
Specialization and Trade
• Nations have different resource endowments
• Land, Labor, Capital, and Entrepreneur
• Goods and services are produced with different combinations of resources
• Land-intensive goods: Agricultural & mining goods
• Labor-intensive goods: Manufacturing & services
• Capital-intensive goods: Manufacturing & services
• Some economies are good at producing land-intensive goods, while others are good at Labor-intensive or Capital-intensive goods.
LO2
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38-18
Specialization and Trade
• Each person or economy can produce identical goods and services.
• Each person and economy has different skill/technology and resources. Their production possibilities frontiers differ, and so as their opportunity costs.
• With limited resources each person and economy should specialize in producing goods and services that they are good at, to achieve greater production, then trade each others. ⇒ More efficient!
LO2
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38-19
• Assume U.S. and Mexico have the same amount of labor resources, and they can produce vegetables or beef using own labor
• U.S. can produce maximum of 30 tons of vegetables or 30 tons of beef, but currently producing 12 tons of vegetable or 18 tons of beef
• Mexico can produce maximum of 20 tons of vegetables or 10 tons of beef, but currently producing 4 tons of vegetable or 8 tons of beef
Absolute Advantage
LO2
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38-20
Absolute Advantage
(a) United States (b) Mexico
Veg
etab
les
(To
ns) 30
25
20
15
10
5
0
35
40
45
5 10 15 20Beef (Tons)
Veg
etab
les
(To
ns) 30
25
20
15
10
5
0
35
40
45
5 10 15 20 25 30Beef (Tons)
12
18 8
4
A
Z
LO2
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38-21
• Absolute advantage: one nation is more productive than another—needs fewer inputs or takes less time to produce a good or perform a production task.
• U.S. has an absolute advantage in production of both vegetables and beef over Mexico
• With same number of labor the U.S. can produce more vegetables than Mexico (30 > 20)
• With same number of labor the U.S. can produce more beef than Mexico (30 > 10)
• Should the U.S. trade with Mexico?
Absolute Advantage
LO2
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38-22
• Comparative advantage: the ability of a nation to produce a good or service at a lower opportunity cost than someone else.
• When one nation has a comparative advantage in producing one good, the other nation has a comparative advantage in producing the other goods.
• Opportunity cost: Opportunity cost of producing one good is the decrease in the quantity of the other good as it moves along the PPF.• The slope of PPF measures the opportunity cost of
producing goods measured along X-axis.
Comparative Advantage
LO2
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38-23
Comparative Advantage
(a) United States (b) Mexico
Veg
etab
les
(To
ns) 30
25
20
15
10
5
0
35
40
45
5 10 15 20Beef (Tons)
Veg
etab
les
(To
ns) 30
25
20
15
10
5
0
35
40
45
5 10 15 20 25 30Beef (Tons)
12
18 8
4
A
Z
LO2
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38-24
• Opportunity cost of producing 1 ton of beef:• 1 pound of vegetables in U.S.• 2 pounds of vegetables in Mexico• The U.S. has a comparative advantage of
producing beef over Mexico
• Opportunity cost of producing 1 ton of vegetable:• 1 pound of beef in U.S.• 1/2 pounds of beef in Mexico• The Mexico has a comparative advantage of
producing vegetables over the U.S.
Comparative Advantage
LO2
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38-25
Comparative Advantage
• Law of comparative advantage: A nation should specialize in producing goods and services on which the nation has a comparative advantage.• Nations can gain from specializing in production of
the goods in which they have a comparative advantage and then trading.
• The U.S. should specialize in production of beef and produce 30 tons.
• Mexico should specialize in production of vegetables and produce 20 tons.
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38-26
Comparative Advantage
• Trade: the U.S. trades 10 tons of beef for 15 tons of vegetable.• The U.S. exports 10 tons of beef and imports 15
tons of vegetables.
• After trade• The U.S. can consume 20 tons of beef (= 30 – 10)
and 15 tons of vegetables (= 0 + 15)• Mexico can consume 10 tons of beef (= 0 + 10)
and 5 tons of vegetables (= 20 – 15)
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38-27
Comparative Advantage
• Gains from Trade: After specialization and trade each nation can consume than before trading.• The U.S. can consume 2 extra-tons of beef (= 20 – 18)
and 3 extra-tons of vegetables (= 15 – 12)• Mexico can consume 2 extra-tons of beef (= 10 – 8)
and 1 extra-ton of vegetables (= 5 – 4)
• Two nations mutually benefit from trade.• Both nations achieve consumption combinations
beyond own PPF.
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38-28
Gains from Trade
(a) United States (b) Mexico
Veg
etab
les
(To
ns
) 30
25
20
15
10
5
0
35
40
45
5 10 15 20Beef (Tons)
Veg
etab
les
(To
ns)
30
25
20
15
10
5
0
35
40
45
5 10 15 20 25 30Beef (Tons)
12
18 8
4
A
Z
A’
Z’
V
V’
W
v
b b’
TradingPossibilities Line
TradingPossibilities Line
B
LO2
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38-29
Comparative Advantage
LO2
• Summary
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38-30
Comparative Advantage
• Terms of trade: Rate of exchange of two goods• 2 tons of beef = 3 tons of vegetables
• Trading possibilities line: a line starting from the production combination point under specialization with its slope equals terms of trade• Both nation can choose any combination of two
goods along the trade possibilities line under the terms of trade as own consumption point
LO2
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38-31
Comparative Advantage
• Why do they trade?• Before trade, an opportunity cost of 1 ton of
vegetables was 1 ton of beef in the U.S. and ½ tons of beef in Mexico.
• It is cheaper to buy vegetables from Mexico than producing by itself even at terms of trade of 2/3 tons of beef.
• How about beef for Mexico?
LO2
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38-32
Increasing Cost and Trade
• Under constant costs• PPF is a straight line• Complete specialization
• Under increasing costs• Concave PPF• Resources not perfectly substitutable • Incomplete specialization: both nations still
produce both goods
LO2
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38-33
Supply and Demand Analysis of International Trade
• Without international trade, the market must be at equilibrium in each country
• If foreign price is different from domestic price• Firms want to sell products at higher price, so firms
exports to the country where the market price is higher
• Households want to buy products at lower price, so households imports from the country where the market price is lower
LO3
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38-34
Supply and Demand Analysis of International Trade
• If foreign price > domestic price• Domestic firms make more profits by selling to
foreigners• Export to foreign country• Domestic price rises• Surplus will be exported• Export supply curve
LO3
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38-35
Supply and Demand Analysis of International Trade
• If foreign price < domestic price• Domestic consumers can buy cheaply from foreign
firms• Import from foreign country• Domestic price falls• Shortage will be imported• Import demand curve
LO3
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38-36
Supply and Demand Analysis of International Trade
• At equilibrium• Exporting country has surplus, while importing
country has shortage• Trade must be balanced: Export must be equal to
import• Surplus in the exporting country must be equal to
shortage in the importing country• Trade ends when the price in tow countries are
the same.
LO3
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38-37
1.50
1.25
1.00
.75
.50
050 100
Quantity of Aluminum(Millions of Pounds)
Pri
ce (
Per
Po
un
d;
U.S
. D
oll
ars
Pri
ce (
Per
Po
un
d;
U.S
. D
oll
ars
1.50
1.25
1.00
.75
.50
050 75 100 125 150
Quantity of Aluminum(Millions of Pounds)
Supply and Demand Analysis of International Trade
(a) U.S. Domestic Aluminum Market
(b) U.S. Export Supplyand Import Demand
Dd
Sd
U.S.ExportSupply
U.S.Import
Demand
a
b
c
x
y
Surplus = 50
Surplus = 100
Shortage = 50
Shortage = 100
LO3
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38-38
Pri
ce (
Per
Po
un
d;
U.S
. D
oll
ars
1.50
1.25
1.00
.75
.50
050 75 100 125 150
Quantity of Aluminum(Millions of Pounds)
1.50
1.25
1.00
.75
.50
050 100
Quantity of Aluminum(Millions of Pounds)
Pri
ce (
Per
Po
un
d;
U.S
. D
oll
ars
(a) Canada’s Domestic Aluminum Market
(b) Canada’s Export Supplyand Import Demand
Dd
Sd
CanadianExportSupply
CanadianImport
Demand
q
r
s
t
Surplus = 50
Surplus = 100
Shortage = 50
Supply and Demand Analysis of International Trade
LO3
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38-39
International Trade Equil ibrium
1.00
.75
.88
050 100
Quantity of Aluminum(Millions of Pounds)
Pri
ce (
Per
Po
un
d;
U.S
. D
oll
ars
Import demand = Export supply
CanadianExportSupply
e
U.S.ExportSupply
U.S.Import
Demand
Equilibrium
CanadianImport Demand
LO3
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38-40
Case for Free Trade
• All countries participating trade benefit from specialization and trade• Promote efficiency• Promote competition• Variety of goods and services• Higher standard of living (more
consumption possible)
LO2
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38-41
Trade Barriers
• Trade Barriers: The government-imposed restraint on the international trade of goods or services• Tariffs: Excise taxes on imported goods• Import quota: A limit on the quantity of goods
imported• Nontariff barrier (NTB): licensing, product standard,
inspection, and other government measures intended to restrict imports
• Voluntary export restriction (VER): Exporting country voluntarily limits the amount of exports
• Export subsidy: Subsidies on export goodsLO4
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38-42
Economic Impact of Trade Barriers
• Direct effects• Increase in domestic price• Decline in consumption (Loss of consumer surplus)• Increase in domestic production and profits of domestic firms• Decline in imports• Tariff revenue
• Indirect effects• Loss of efficiency (Producing at higher cost)• Decline in exports (Trade is an exchange of goods produced)• Decline in standard of living and welfare
LO4
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38-43
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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38-44
Multi lateral Trade Agreements
• World Trade Organization (WTO)• European Union (EU)• North American Free Trade Agreement
(NAFTA)• Trans-Pacific Partnership (TPP)
LO6
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38-45
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
LO6
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38-46
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
LO6
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38-47
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
LO6
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38-48
Trade Adjustment and Offshoring
• Trade Adjustment Assistance Act• Designed to help individuals hurt by
international trade• Offshoring of jobs• Shifting of work previously done by
American workers to workers abroad
LO6