Fifth Edition

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Fifth Edition International Trade
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Exports Imports

• Exports of Goods Services in U.S. (11 of GDP)
• High Tech Manufactured Software
• Industrial Supplies Equipment
• Agricultural Products
• Entertainment Products
• Imports of Goods Services (13 of GDP)
• Manufactured Consumer Goods
• Capital Goods

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Terms

• Absolute Advantage- a country can produce a good
  with fewer resources than another country
• Comparative Advantage- each country should
  produce the good with its lower opportunity cost
• Terms of Trade- how much of one good should be
  traded for another

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Reasons for International Specialization

• Differences in Resource Endowment (All
  resources, not just natural)
• Economies of Scale- produce at greater volumes to
  lower unit costs (to a point)
• Differences in Taste- tastes and preferences of
  items differ among countries

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Trade Terms

• Producer Surplus- the amount of the net benefits
  producers gain by selling more goods at a higher
  price than their minimum.
• Or the difference between what they received and
  the minimum amount they would accept.
• Consumer Surplus- the differences between the
  maximum sum of money consumers would pay for a
  good and the actual amount that they were willing
  to pay

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Trade Terms (cont)

• World Price- the price at which a good is traded
  internationally
• World Demand
• World Supply
• Tariffs A tax on imports.

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Exhibit 5 Effect of a Tariff
At .10, domestic suppliers Supply 20, consumers
demand 70, 50 is imported At .15 (.05 cent
tariff), domestic Suppliers supply 30,
consumers Demand 60, 30 is imported
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RE Exhibit 5

• Area a is an increase in Producer surplus
• Area b and f are additional revenues to
  producers offset by higher marginal costs
• Area b is welfare loss 10 more at .15 instead of
  .10)
• Government revenue is area c (.05 30)
• Area d is loss of consumer surplus-(10 tons less
  consumed or available.

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Import Quota

• Legal limit of a quantity that can be imported
• The limit must be less than that under free trade

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Exhibit 6a Effect of a Quota
No Quota Price
Extra Supply of Quota Amount
30
Domestic Producers Sell 20 at .10 (world
price) Quota takes over for Next 30 at .10
(world Price) Any other sales are Domestic at
higher price
Import Sales
Domestic Sales
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Exhibit 6b Effect of a Quota
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Quota Analysis

• Area a- amount transferred from consumers to
  producers (at higher domestic price of .15
• Area b- welfare loss- cost of producing an extra
  10 at the higher domestic cost rather than buying
  it at .10.
• Area c- gain for those who can import at the
  world price (.10 and sell for .15)
• Area d- net consumer loss of 10 in consumption

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Quota vs Tariff

• Tariff-
• Consumer loses- pays higher price and some
  consumption lost
• Government collects revenue in tariff
• Quota
• Consumer loses, pays higher price and some
  consumption lost
• Whoever sells the quota amount gains the extra
  revenue between the world price and the higher
  domestic price

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Other Trade Restrictions

• Export Subsidies- assistance to a firm to
  encourage exports
• Domestic Content Requirements
• Health, safety, and technical requirements

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Trade Agreements

• GATT- General Agreement on Tafiffs and Trade- 23
  countries
• Adopted in 1947
• Treat all nations equally
• Reduce tariff rates through negotiations
• Reduce import quotas
• By 1994- 123 countries, phased reduction on
  tariffs in 85 of countries, elimination of
  quotas (over time)
• Created WTO

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World Trade Organization

• Created by and Supercedes GATT
• Headquarters in Geneva, Switzerland
• Includes services and products, including
  intellectual property rights
• Under Most Favored Nations Clause must offer
  other member nations same trade concessions to
  any other countries.
• Created a dispute resolution process.

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Regional Trade Agreements

• European Union- created essentially a trade-free
  Europe
• Currency the euro is a direct result
• NAFTA

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Arguments for Trade Restrictions

• National Defense
• Infant Industry
• Anti-dumping
• Jobs and Income
• Declining Industries