International Trade

1
International Trade 1) Composition of trade 2)
Opportunity Cost and Comparative Advantage ?
Gains from trade 3) Barriers to Trade - Tariffs
(like a tax) - Non-tariff barriers (e.g.,
quotas, VERs) 4) International trade and labor
markets
2
Composition of International Trade, 1999 (in
billions of dollars)
3
Composition of Trade in Goods, 1999(in billions
of dollars)
4
Composition of Trade in Services,1999(in
billions of dollars)
5
Growth in U.S. International Trade
6
Top Five Trading Partners, 1999(in billions of
dollars)
7
Changes in Trade with top Top Five Trading
Partners, 1991-1999
8
Gains from Trade - Differences in opportunity
costs mean that countries can gain from trading
with each other - A country has a Comparative
Advantage in a good if it can produce the good at
lower opportunity cost - Will see countries
producing more of goods in which they have a
comparative advantage and trading these for other
goods - Such specialization and trade allows both
countries to consume outside their PPFs
9
Opportunity Cost in Farmland
36
30
24
Grain(billions of bushels per year)
A
15
6
Farmlands PPF
4
0
8
12
7
9
Cars (millions per year)
10
Opportunity Cost in Mobilia
20
A'
18
Grain (billions of bushels per year)
14
12
Mobilias PPF
6
4
0
8
12
2
Cars (millions per year)
11
Opportunity Cost and Comparative Advantage

• Mobilia has a comparative advantage in car
  production.
• Farmland has a comparative advantage in grain
  production.

12
International Trade in Cars
9
6
Price (thousands of bushels of grain per car)
3
1
0
2
6
4
Quantity (millions of cars per year)
13
Gains from Trade

• Balanced Trade
• Farmland pays for its cars by exporting grain.
• They export 12 billion bushels of grain for 4
  million cars.
• Mobilia is exporting 4 million cars for 12
  billion bushels of grain.
• Trade is balanced.

14
Gains from Trade

• Changes in Production and Consumption
• How is it possible for everyone to gain?
• With international trade an economy can consume a
  different quantity than it produces.

15
Expanding Consumption Possibilities
48
45
Farmland
36
Grain(billions of bushels per year)
30
24
18
12
6
4
0
16
8
12
9
5
15
Cars (millions per year)
16
Expanding Consumption Possibilities
Mobilia
36
Grain(billions of bushels per year)
C'
24
21
A'
9
4
0
16
8
12
9
5
Cars (millions per year)
17
Trade Restrictions

• Tariffs are a tax imposed by an importing country
  when an imported good crosses its international
  boundary.
• Nontariff barriers are actions other than a
  tariff that restrict international trade.
• Quantity restrictions, licensing requirements.

18
U.S. Tariffs 19302000
19
Trade Restrictions

• How Tariffs Work
• What happens if Farmland places a tariff on
  the importation of cars
• The supply of cars in Farmland decreases.
• The price of a car in Farmland rises.
• The quantity of cars imported by Farmland
  decreases.

20
Trade Restrictions

• How Tariffs Work
• What happens if Farmland places a tariff on
  the importation of cars?
• The government of Farmland collects the tariff
  revenue.
• Resource use is inefficient.
• The value of exports changes by the same amount
  as the value of imports and trade remains
  balanced.

21
The Effects of a Tariff
9
6
Price (thousands of bushels of grain per car)
Mobilias export supply of cars
3
2
Farmlands import demand for cars
1
0
2
4
6
Quantity (millions of cars per year)
22
Trade Restrictions

• Nontariff Barriers
• Quotas are a quantitative restriction on the
  import of a particular good.
• Voluntary export restraints (VER) are agreements
  between two governments in which the government
  of the exporting country agrees to restrain the
  volume of its own exports.

23
The Effects of a Quota
9
6
Price (thousands of bushels of grain per car)
Mobilias export supply of cars
3
2
Farmlands import demand for cars
1
0
2
4
6
Quantity (millions of cars per year)
24
The Effects of an Export Restraint
9
6
Price (thousands of bushels of grain per car)
Mobilias export supply of cars
3
2
Farmlands import demand for cars
1
0
2
4
6
Quantity (millions of cars per year)
25
Tariffs vs. Quotas vs. V.E.R.s 1) Who gets
profit? - Government - Importer -
Manufacturer 2) Effect on Q P - Quota/VER ?
Q fixed, P varies - Tariff ? both P Q
vary 3) Politics - Congress vs. President -
Trade War ? V.E.R.
26
Some (incorrect) Arguments for Protection

• 1) Saves jobs.
• 2) Allows us to compete with cheap foreign labor.
• 3) Brings diversity and stability.
• 4) Penalizes lax environmental standards.
• 5) Protects national culture.
• 6) Prevents rich countries from exploiting
  developing countries.

27
International Trade and the Labor Market - Trade
and employment and wages - Immigration and
employment and wages