Frank Dante explain 9 tips of International Trade

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International Trade
Frank
danteDante

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Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Introduction
• Understanding the Economic Issues of
International Trade
– The benefits of trade
– The costs of trade
– The economic impact of trade restrictions
Chapter 9: International Trade Slide 2

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Comparative Advantage
as a Basis for Trade
• The principle of comparative advantage tells
us that we can all enjoy more goods and
services when each country produces
according to its comparative advantage, and
then trades with other countries.

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Production and Consumption Possibilities and the
Benefits of Trade
• Closed Economy
– An economy that does not trade with the rest of
the world
• Open Economy
– An economy that trades with other countries

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Production Possibilities
Curve for a Many-Worker Economy
Computers (number/year)
Coffee(pounds/year)
B
C
A
D
Observations
• The OC of producing an
additional unit = the slope of
the line that touches the point
• OC will increase as output of
on good increases
100,000
40,000
1,000 2,000

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Benefits of Trade
• A country’s PPC shows the quantities of
different goods that its economy can produce.
• Consumption Possibilities
– The combinations of goods and services that a
country’s citizens might feasibly consume

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Benefits of Trade
• In a closed economy:
– Society’s production possibilities = consumption
possibilities.
– If a country is self-sufficient, it is called autarky.

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Benefits of Trade
• In an open economy:
– The society’s consumption possibilities are
typically greater than its production possibilities.

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Buying and Selling in World Markets
Computers/year
Coffee(pounds/year)
B
C
A
D
Assume:
• Producing at D
• Closed economy
• World price of coffee = $10/lb and
computer = $500
120,000
100,000
1,000
50,000
2,000 2,400
150,000
3,000

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Computers/year
Coffee(pounds/year)
B
C
A
D
F
Observation:
• Sell 2,000 computers @ $500
• Take the $1million and buy 100,000
pounds of coffee
• Consumption possibilities of 150,000 is
greater than PPC without trade
E
150,000
120,000
100,000
1,000
50,000
2,000 2,400 3,000
Consumption
possibilities
Production
possibilities

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Computers/year
Coffee(pounds/year)
B
C
A
D
F
Observation:
• Start at D
• Sell 50,000 lbs of coffee
• Buy 1,000 computers with the $500,000
• Pt F is possible with trade but not on the PPC
E
150,000
120,000
100,000
1,000
50,000
2,000 2,400 3,000
Consumption
possibilities
Production
possibilities

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Production Possibilities, Consumption Possibilities, and the Optimal
Production Mix for an Open Economy
Computers/year
Coffee(pounds/year)
B
C
A
D
F
• 50 lbs of coffee trades for 1 computer
• LM = consumption possibilities
• G is the optimal combination for Costa Rica
• Costa Rica can use trade to locate anywhere
along LM
E
150,000
120,000
100,000
1,000
50,000
2,000 2,400 3,000
Consumption
possibilities
Production
possibilities
160,000
3,200
G
M
L

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Production Possibilities, Consumption Possibilities, and the Optimal
Production Mix for an Open Economy
Computers/year
Coffee(pounds/year)
B
C
A
D
F
Why produce at G?
• Slope of the PPC = LM
• Domestic and international opportunity costs
of acquiring an extra computer (in terms of
forgone coffee) are equal
E
150,000
120,000
100,000
1,000
50,000
2,000 2,400 3,000
Consumption
possibilities
Production
possibilities
160,000
3,200
G
M
L

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A Straight-Line Production Possibilities Curve
Tea (pounds/year
Coffee(pounds/year)
B
C
A
D
Observation
• The tradeoff between
coffee and tea is
constant at any point
on the PPC
200
200
600
800
600 800

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Two Consumption Possibilities Curves
Tea (pounds/year
Coffee(pounds/year)
B
C
A
D’
600
200
600
800
800 1,600
D
200
• Islandia produces at A
• Islandia can use the money
earned from selling 800 lbs
of coffee to choose any
combination on AD’
Consumption possibilities curve
when the world price of coffee is
twice the world price of tea

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Two Consumption Possibilities Curves
Tea (pounds/year
Coffee(pounds/year)
B
C
A
600
200
600
800
800
1,600
D
200
• Islandia produces at D
• Islandia can choose any
combination on A’D
Consumption possibilities curve
when the world price of tea is
twice the world price of coffee
A’

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Consumption Possibilities With
and Without International Trade
• What Do You Think?
– Where should Islandia produce if the price of
coffee and tea were the same?

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Consumption Possibilities With
and Without International Trade
• Observations
– With a bow-shaped PPC consumption possibilities
is typically maximized by producing where the PPC
is tangent to the consumption possibilities line.
– With a straight-line PPC production is completely
specialized.

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Benefits of Trade
• Economic Naturalist
– Does “cheap” foreign labor pose a danger to high-
wage economies?

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Benefits of Trade
– Scenario
• U.S. and Fredonia produce software and beef.
• Real wages in Fredonia are lower than in the U.S.
• Fredonia is half as productive as the U.S. in beef
production.
• Fredonia is one-tenth as productive in software
production.

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Benefits of Trade
– Outcome
• Fredonia has a comparative advantage in beef.
• U.S. has a comparative advantage in software.
• The U.S. will trade software for beef and increase its
consumption of both.
• Employment in the software industry in the U.S.
increases and employment in the beef industry will
decrease.

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The Market for
Computers in Costa Rica
Computer per year
Without Trade
Computer per year
With Trade
Domestic
demand
Domestic
supply
Consumer surplus
with trade = $1.96mil/yr
Producer surplus
with trade = $360K/yr
World
price
2,000 4,800
E
F
1,200 2,800
Computer Imports
2,000 4,800
2,400
1,400
400
Domestic
demand
Domestic
supply
Consumer surplus
without trade = $1mil/yr
Producer surplus
without trade = $1mil/yr
2,400
1,400
400
1,000
E

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A Supply and Demand
Perspective on Trade
• If the price of a good or service in a closed
economy is greater than the world price, and
that economy opens itself to trade, the
economy will tend to become a net importer
of that good or service.

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The Market for
Coffee in Costa Rica
Coffee (pounds/year)
Without Trade
100,000 240,000
12
7
4
Domestic
demand
Domestic
supply
Consumer surplus
without trade = $250K/yr
Producer surplus
without trade = $150K/yr
E
Coffee (pounds/year)
With Trade
100,000
12
7
4
Domestic
demand
Consumer surplus
Producer surplus
E
Domestic
supply
World
price
F
40,000 200,000 240,000
Coffee exports
10

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A Supply and Demand
• If the price of a good or service in a closed
economy is lower than the world price, and
that economy opens itself for trade, the
economy will tend to become a net exporter of
that good or service.

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A Supply and Demand
• Observations of the Mutually Beneficial Gains
from Trade
– Countries will profit by exporting the goods and
services for which they have a comparative
advantage.
– The revenue from the exports are used to import
goods and services for which they do not have a
comparative advantage.

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A Supply and Demand
• Observations of the Mutually Beneficial Gains
from Trade
– The markets will ensure that goods will be
produced where opportunity cost is lowest.
– The consumption possibilities will be maximized.

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Exercise 9.4
Computers per year
Priceofcomputers($/computer)
200
Domestic
supply
World
price
Domestic
demand
500 800 1,200
600
1,200
2,100
2,400
Question
•Given the graph shown,
what impact would trade
have on producer and
consumer surplus?

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A Supply and Demand
• Winners and Losers from Trade
– Winners
• Consumers of imported goods
• Producers of exported goods
– Losers
• Consumers of exported goods
• Producers of imported goods

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A Supply and Demand
• Protectionism
– The view that free trade is injurious and should
be restricted
• Tariff
– A tax imposed on an imported good
• Quota
– A legal limit on the quantity of a good that may
be imported

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The Market for Computers after the
Imposition of an Import Tariff
Computers per year
1,200
World price
+ tariff
1,600 2,400
1,000
1,200
Domestic
supply
World price
Domestic
demand
4,800
400
2,400
E
2,800
Imports
without
tariff

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Imposition of an Import Tariff
Computers per year
1,200
Domestic
supply
World price
Domestic
demand
4,800
400
1,200
2,400
1,000
World price
+ tariff
E
1,600 2,400 2,800
Imports
with
tariff
Consumer surplus
with tariff = 1.44K/yr
Producer surplus
with tariff = 640K/yr
Tariff revenue =
$160K/yr

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Exercise 9.5
Computers per year
200
Domestic
supply
World
price
Domestic
demand
500 800 1,200
600
1,200
2,100
3,600
Question
•Given the graph shown,
how will a tariff of $300
per computer affect total
economic surplus?
1,500
300 700

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Protectionist Policies: Tariffs
and Quotas
• What do you think?
– Why did President George W. Bush support the
imposition of tariffs on steel imported into the
United States?

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Protectionist Policies: Tariffs
and Quotas
• Quotas
– Legal limit on the number or value of foreign
goods that can be imported
– Can be enforced by issuing permits

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Imposition of an Import Quota
1,200
1,600 2,400
Domestic
supply + quota
F
Computers per year
1,200 2,800
Imports with free trade
= 1,600 computers/yr
1,000
Domestic supply
World price
Domestic
demand
4,800
2,400
E
1,400
2,000
400

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Imposition of an Import Quota
1,200
1,600 2,400
Domestic
supply + quota
F
Computers per year
1,200 2,800
Imports = 800
computers/year
1,000
Domestic supply
World price
Domestic
demand
4,800
2,400
E
1,400
2,000
400
Economic rent to
holders of import
licenses = $80K/year
Producer surplus
with quota = $640K/yr
Consumer surplus
with quota = $1,440K/yr

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A Supply and Demand
• Quotas & Tariffs
– Market effects of tariffs are the same.
– Tariffs generate tax revenue.
– Quotas generate revenue for the firms that hold
an import license.

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A Supply and Demand
• Question
– Why would the government ever impose a
quota rather than a tariff?

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A Supply and Demand
– Who benefited from and who was hurt by
voluntary export restraints on Japanese
automobiles in the 1980s?

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A Supply and Demand
• Other Barriers to Trade
– Red-tape barriers
– Regulations

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A Supply and Demand
• The Inefficiency of Protectionism
– Trade barriers are inefficient and reduce the size
of the economic pie.
– Because trade barriers benefit certain groups,
and these groups may be well organized, they
may be successful in lobbying for trade barriers.
– The gains from trade could be used to assist
groups that have been hurt by trade.

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Outsourcing
• Outsourcing
– A term increasingly used to connote having
services performed by low-wage workers
overseas

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Outsourcing
• Outsourcing
– Outsourcing of services to low-wage foreign
workers is exactly analogous to the importation
of goods manufactured by low-wage foreign
workers.

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Outsourcing
– Paul Solman and his associate Lee Koromvokis
produce video segments that provide in-depth
analysis of current economic issues for the PBS
evening news program, The NewsHour with Jim
Lehrer.
– Is it likely that his job will someday be
outsourced to a low-wage reporter from
Hyderbad?

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Outsourcing
• Characteristics of Jobs that are Less
Susceptible to Outsourcing
– Less rules-based jobs
– “Face-to-Face” complex communication jobs
– Jobs that require the worker to be physically
present

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Outsourcing
• Responding to changing economic conditions
requires the ability to adapt quickly to new
circumstances.
• Education provides the means to develop a
comparative advantage that is not rules-
based and does require complex face-to-face
communication.

Frank Dante explain 9 tips of International Trade

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