International Trade

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International Trade
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Comparative Advantage

• Comparative Advantage The situation in which a
  country can produce a good at a lower opportunity
  cost than another country.
• Countries specialize in the production of the
  good in which they have a comparative advantage

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Comparative Advantages

• After they have specialized in production, the
  two countries must settle on the terms of trade.
• A country gains by specializing in producing and
  trading the good in which it has a comparative
  advantage
• It is individuals desire to earn a dollar, euro,
  or a pound that determines the pattern of
  international trade. The desire to earn a profit
  determines what a country specializes in and
  trades.

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Q A

• Suppose the United States can produce 120 units
  of X at an opportunity cost of 20 units of Y, and
  Great Britain can produce 40 units of X at an
  opportunity cost of 80 units of Y. Identify
  favorable terms of trade for the two countries.
• If a country can produce more of all goods than
  any other country, would it benefit from
  specializing and trading? Explain your answer.

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Trade Restrictions

• Specialization and international trade benefit
  individuals in different countries. But this
  benefit occurs on the net. Every person may not
  gain.
• Consumers Surplus Maximum Buying Price the
  Price Paid.
• Producers Surplus Price Received Minimum
  Selling Price

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Consumers and Producers Surplus
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Tariffs

• A Tariff is a tax on imports. The primary effect
  of a tariff is to raise the price of imported
  goods to the domestic consumer.
• The effects of the tariff are a decrease in
  consumers surplus, an increase in producers
  surplus, and tariff revenues for government.

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Tariffs and Consumer surplus, and producers
surplus

• Consumers receive more consumers surplus when
  tariffs do not exist and less when they do.
• Producers receive less producers surplus when
  tariffs do not exist and more when they do exist.

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The Effects of a Tariff

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Quotas

• A Quota is a legal limit on the amount of a good
  that may be imported.
• Because the loss to consumers is greater than the
  increase in producers surplus plus the gain to
  importers, there is a net loss as a result of the
  quota.

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Quotas, Consumers surplus, and Producers surplus

• A quota reduces the supply of a good and raises
  the price of imported goods to domestic
  consumers.
• The effects of a quota are a decrease in
  consumers surplus, an increase in producers
  surplus, and an increase in total revenue to the
  importers who sell the allowed number of imported
  units.

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The Effects of a Quota

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Why Nations Restrict Trade

• National Defense Argument Certain industries
  should remain based in our country, especially if
  they manufacture items vital to our defense.
• Infant Industry Argument New industries must be
  protected from older, established foreign
  competitors until they are mature enough to
  compete. However, removing that protection is
  almost impossible.

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Why Nations Restrict Trade (cont.)

• Antidumping Argument Dumping is the sale of
  goods abroad at a price below their cost and
  below the price charged in the domestic market.
  A foreign competitor could wipe out a market by
  dumping their products in America.
• Foreign Export Subsidies Argument Some
  governments subsidize the firms that export
  goods.

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Why Nations Restrict Trade (cont.II)

• Low Foreign Wages Argument American producers
  cant compete with foreign producers because
  American producers pay high wages to their
  workers and foreign firms pay low wages. A
  countrys low wage advantage may be offset by its
  productivity disadvantage. High wages means High
  productivity. Low wages mean low productivity.
• Saving Domestic Jobs Argument This argument is
  actually most of the previous arguments but in
  disguise.

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What Price Jobs?

• Voluntary Export Restraint (VER) is an
  agreement between two countries in which the
  exporting country voluntarily agrees to limit
  its exports to the importing country.

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World Trade Organization

• The WTOs overriding objective is to help
  trade flow smoothly, freely, fairly, and
  predictably.
• It does these things by administering trade
  agreements, acting as a forum for trade
  negotiation, settling trade disputes, reviewing
  national trade policies, assisting developing
  countries in trade policy issues, and cooperating
  with other international organizations.
• The WTO, in theory, is supposed to lead to freer
  international trade, and there is some evidence
  that is has done just this.
• Critics often say that it has achieved this
  objective at some cost to a nations sovereignty.