Chiang 3e Lect PPT CH 26 Econ CH 16 Micro CH 15 Macro

Tatiana Nikolaevna Kalashnikova/Getty Images
CHAPTER 15 (26):
INTERNATIONAL TRADE
COREECONOMICS, 3RD EDITION BY ERIC CHIANG

Slides by Debbie Evercloud
2013 Worth Publishers
CoreEconomics Chiang/Stone
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CHAPTER OUTLINE
The Gains From Trade
The Terms of Trade
Arguments Against Free Trade

CoreEconomics Chiang and Stone
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LEARNING OBJECTIVES
At the end of this chapter, the student will
be able to:
Describe the benefits of free trade
Distinguish between absolute and
comparative advantage
Describe the economic impacts of trade
Define the terms of trade

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LEARNING OBJECTIVES
At the end of this chapter, the student will
be able to:
List the ways in which trade is restricted
Discuss the various arguments against free
trade
Debate the issues surrounding increasing
global economic integration

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EXAMPLE: IMPORTS AND

EXPORTS
Take a quick look at your closet, and count
how many countries contributed to your
wardrobeshirts tailored in Hong Kong,
shoes made in Italy, sweaters made in
Norway, jackets made in China, and so on.

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EXAMPLE: IMPORTS AND

EXPORTS
What do American firms export to the rest
of the world?
Goods: commercial airplanes, cars and
trucks, tractors, high-tech machinery,
pharmaceuticals, agricultural goods, and raw
materials, such as soybeans and copper
Services: medical services, tourist services,
higher education, and entertainment,
including movies, software, and music
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BY THE NUMBERS: CHINA

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GAINS FROM TRADE

A country that does not trade at all is
called an autarky.
Those countries that trade the least are
called closed economies.
Most countries are open economies that
willingly and actively engage in trade with
other nations.

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GAINS FROM TRADE

Trade consists of imports, goods and
services purchased from other countries,
and exports, goods and services sold
abroad.

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VOLUNTARY TRADE
Many people assume that trade between
nations is a zero sum game: a game in
which, for one party to gain, the other
party must lose.
But voluntary exchange is in fact a
positive sum game, meaning that both
parties to a transaction can gain.

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ABSOLUTE AND COMPARATIVE

ADVANTAGE
An absolute advantage exists when one
country can produce more of a good than
another country.
One country enjoys a comparative
advantage in producing a particular good
if it can do so at the lowest opportunity
cost.
If each country specializes according to its
comparative advantage, both nations can be
made better off through trade.
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COMPARATIVE ADVANTAGE
Assume the following numbers for our
example of comparative advantage:
In the U.S., the opportunity cost of producing one
cow is one guitar.
In Canada, the opportunity cost of producing one
cow is 4/10 of a guitar.
In this example, Canada has the comparative
advantage in cattle, because the opportunity cost
is lower.
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COMPARATIVE ADVANTAGE
Both countries can be made better off by
specializing according to their comparative
advantage.
Canada will produce beef.
The United States will produce some beef and
some guitars.

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PRACTICAL CONSTRAINTS ON
TRADE
Some practical constraints on trade:
Every transaction involves costs, including

transportation, communications, and the
general costs of doing business.
Over the last several decades, however,
transportation and communication costs
have declined.

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PRACTICAL CONSTRAINTS ON
TRADE
Some practical constraints on trade:
The production possibilities curves for nations
are not linear; they are governed by
increasing costs and diminishing returns.
Specializing in one product is risky since the
market for any one product can always
decline, new technology might replace it,
or production can be disrupted by changing
weather patterns.

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EFFECTS OF VOLUNTARY
TRADE
Although it is true that trading partners will
benefit from trade, some individuals and
groups within each country may lose.

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CHECKPOINT: THE GAINS FROM

TRADE
A comparative advantage exists when one
country can produce a good at a lower
opportunity cost than another country.
Both countries gain from trade when each
specializes in producing goods in which
they have a comparative advantage.

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THE TERMS OF TRADE

When countries trade many commodities,
the terms of trade are defined as the
average price of exports divided by the
average price of imports.
As a country devotes more resources to
producing one particular item, it will encounter
increasing opportunity costs.
As each product settles into an equilibrium
price, the terms of trade are established.
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WINNERS AND LOSERS

IN FREE TRADE
With free trade, some sectors of the
economy win and others lose.
American consumers have been happy to
purchase Korean televisions, such as
Samsung and LG.
American television manufacturers have not
been so pleased. These firms have had to
adapt to overseas competition.

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WINNERS AND LOSERS

IN FREE TRADE
As textile production has been relocated to
low-wage countries, American consumers
have enjoyed a substantial drop in the
price of clothing.
Still, being able to purchase inexpensive
imported clothes is small consolation for
the unemployed textile workers in North
Carolina.
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TRADE RESTRICTIONS
The most common forms of trade
restrictions are tariffs and quotas.
A tariff is a tax collected on imports.
A quota restricts the volume of imports.

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TARIFFS
Tariffs are often ad valorem taxes.
This means the product is taxed by a certain
percentage of its price as it crosses the
border.
Other tariffs are unit taxes, in which a fixed

tax per unit of the product is assessed at
the border.

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EFFECT OF A UNIT TARIFF

Price in $
With a tariff, domestic

consumers pay more than
otherwise. Some of this added
expense is collected by domestic
producers. The shaded area
represents the amount of
government revenue
D
collected.
600
500
400
Quantity in thousands

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QUOTAS
Under a quota system, the government
limits imports to a specified quantity.
No revenue is collected for the government,
but prices are higher because of the restricted
quantity.
This translates into more profit for the
manufacturer.

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QUOTAS
The United States imposed quotas on
Japanese automobiles in the 1980s.
The primary effect of these quotas was to
dramatically raise the minimum standard
equipment and price for some Japanese cars.
If a firm is limited in the number of vehicles it can
sell, why not sell higher-priced ones where the
profit margins are higher?

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EFFECT OF A QUOTA
Price in $
A quota is a restriction
on the quantity of imports.
The domestic price will rise to
the market-clearing level,
but no revenue is collected
for the government.
600
500
400
Quota
Quantity in thousands

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ISSUE: FOREIGN TRADE ZONES

A foreign trade zone is a designated area
in a country in which foreign companies
can import inputs, without tariffs, to be
used for product assembly by local
workers.
The workers are often paid a fraction of
what equivalent workers would be paid in
the companys home country.
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ISSUE: FOREIGN TRADE ZONES

What may be surprising, however, is that
foreign trade zones are not limited to
developing countries with low labor costs.
The United States has many foreign trade
zones established for the same purpose:
to attract foreign companies to invest in
manufacturing plants.

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CHECKPOINT: TERMS OF
TRADE
The terms of trade are determined by the
ratio of the price of exported goods to the
price of imported goods.
Tariffs are taxes on imports that protect
domestic producers and generate revenue
for the government.
Quotas restrict the volume of particular
imports that can come into a country.
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ARGUMENTS AGAINST
FREE TRADE
Antifree trade arguments fall into two
camps:
Traditional economic arguments
Globalization concerns

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TRADITIONAL ECONOMIC
ARGUMENTS
The Infant Industry Argument
An infant industry is one so underdeveloped
as to not be able to survive in the global
environment.
Unless the industrys government provides it
with some protection through tariffs, quotas,
or subsidies, it might not survive in the face of
foreign competition.

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ARGUMENTS
Drawbacks of the Infant Industry
Argument:
First, protecting an industry must be done in a
way that makes the industry internationally
competitive.
With tariff protection, an industry may never
mature.

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ARGUMENTS
Drawbacks of the Infant Industry
Argument:
Second, infant industry protection tends to
focus on capital manufacturing.
Third, many industries seem to be able to
develop without protections, so countries may
be wasting their resources and reducing their
incomes by imposing protection measures.

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ARGUMENTS
Antidumping Argument:
Dumping means that goods are sold at lower
prices (perhaps below cost) abroad than in their
home market. This often is a result of
government subsidies.

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ARGUMENTS
Firms can use dumping as a form of predatory
pricing.
They charge higher prices in domestic markets to
support unrealistically low prices in foreign markets.
If the federal government determines that a foreign
firm is dumping products onto the American market,
it can impose antidumping tariffs on the offending
products.

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ARGUMENTS
Low Foreign Wages:
Some advocates of trade barriers maintain
that domestic firms and workers need to be
protected from cheap foreign labor.
On balance, however, the benefits of lowerpriced goods considerably exceed the costs
of lost employment.

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ARGUMENTS
National Defense:
In times of national crisis, the United States
must rely on key domestic industries, such as
oil, steel, and the defense industry.
Some argue that these industries may require
protection even during peacetime to ensure
that they are already well established if a
crisis prevents importing key products.

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GLOBALIZATION CONCERNS
Trade and Domestic Employment
Some firms, unable to compete with imports,
will be forced to lay off workers. Even so,
increased trade usually allows firms that are
exporters to expand their operations and hire
new workers.
For workers who lose their jobs, switching
industries can be difficult and time consuming.

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Trade and the Environment:
Concerns that expanded trade will lead to
increased environmental degradation as
companies take advantage of lax
environmental laws in the developing world
Fears that environmental laws will be viewed
as disguised protectionism

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Will free trade come at the expense of the
environment?
Every action involves a tradeoff.
However, trade policies can also be
complementary to good environmental
policies.

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As professors Bhagwati and Hudec argue,
there has been no systematic race to the
bottom.
Many corporations often have the highest
environmental and labor standards in the
developing world.

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As incomes rise over time, environmental
protection takes on added importance
everywhere.
The demand for environmental quality is
income elastic.

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Working Conditions in Developing
Nations:
Some anti-globalization activists argue that
trade with developing countries simply
exploits workers where wages are low.
But it is not clear that workers would be
helped if the United States were to cut off its
trade with low-wage countries.

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CHECKPOINT:
ARGUMENTS AGAINST FREE TRADE
The infant industries argument claims that
some industries need protection to survive
in a global competitive environment.
Dumping involves selling products at lower
prices in foreign markets, often with the
help of subsidies from the government.
Some argue that domestic workers need
protection from low wages overseas.
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CHECKPOINT:
ARGUMENTS AGAINST FREE TRADE
Globalization has meant that some U.S.
workers have lost jobs to foreign
competition.
The overall effect of international trade has
been to increase overall employment.
Concern about the environment is often a
factor in trade negotiations.

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CHAPTER SUMMARY
Voluntary exchange is a positive sum game,
meaning that both parties to a transaction can
benefit.
International trade is based on the principle of
comparative advantage.
The terms of trade are defined as the average
price of exports divided by the average price of
imports.

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CHAPTER SUMMARY
The most common forms of trade restrictions are
tariffs and quotas.
The traditional economic arguments against free
trade include the following:
Infant industries
Antidumping
Key industries
Environmental degradation
Protection against cheap labor

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DISCUSSION QUESTIONS
Take a look at the items in your backpack.
How many of them were made in other
countries? What about the backpack itself?
Explain the way in which a country can
benefit from trading with other countries that
are less productive overall.
Does an increase in international trade
threaten the national security of the United
States?
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Chiang 3e Lect PPT CH 26 Econ CH 16 Micro CH 15 Macro

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COREECONOMICS, 3RD EDITION BY ERIC CHIANG

2013 Worth Publishers

2013 Worth Publishers

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EXAMPLE: IMPORTS AND

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EXAMPLE: IMPORTS AND

BY THE NUMBERS: CHINA

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GAINS FROM TRADE

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GAINS FROM TRADE

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ABSOLUTE AND COMPARATIVE

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Some practical constraints on trade:

Every transaction involves costs, including

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CHECKPOINT: THE GAINS FROM

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THE TERMS OF TRADE

WINNERS AND LOSERS

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WINNERS AND LOSERS

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Other tariffs are unit taxes, in which a fixed

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EFFECT OF A UNIT TARIFF

With a tariff, domestic

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ISSUE: FOREIGN TRADE ZONES

ISSUE: FOREIGN TRADE ZONES

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