Transcript INTERNATIONAL TRADE

INTERNATIONAL TRADE
Imports _ Goods and services purchased
from other countries
Exports - Goods and services sold to
other countries
Balance of Trade
Trade Deficit
 The amount by which the value of
imports exceeds the value of exports in
a given year.
 Trade Surplus
 The amount by which the value of
exports exceeds the value of imports in
a given year.
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Abraham Lincoln was once advised to buy
cheap iron rails from Britain to finish the
transcontinental railroad. He replied, "It seems
to me that if we buy the rails from England, then
we've got the rails and they've got the money.
But if we build the rails here, we've got our rails
and we've got our money."
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To paraphrase: "If I buy meat from the butcher,
then I get the meat and he gets my money. But
if I raise a cow in my backyard for three years
and slaughter it myself, then I've got the meat
and I've got my money."
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Why don't we keep cows in our backyard?
Essential Questions on trade
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1. Why do nations trade?
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2. What is specialization?
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3. How does a nation determine what it
should specialize in?
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4. How do nations benefit from trade?
IB Past years questions
Three types of protectionism with
graphical analysis
 Comparative advantage
 Marshal-Lerner condition
 Trade diversion
 Trade blocs
 Free trade, good or bad
 Given the benefits of specialization, why
not fully specialize
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Why Nations trade?
Three facts help answer this question:
 ·Uneven distribution of natural, human
and capital resources (Differences in factor
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endowments)
·Efficient production requires different
combinations of resources
 ·People may simply prefer products made
in other countries due to non-price
attributes (Variety and quality of goods)
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Labor-intensive goods
-Examples:
-Where?
Land-intensive goods
-Examples:
-Where?
Capital-intensive goods
-Examples
-Where?
The Heckscher-Ohlin Trade Theory
Trade if the following assumptions hold:
The major factors of production, namely
labor and capital, are not available in the
same proportion in both countries.
 The two goods produced either require
relatively more capital or relatively more
labor.
 Labor and capital do not move between
the two countries.
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Absolute Advantage
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The ability of one country to produce a
specific good with fewer resources than the
other country
Comparative Advantage
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The ability of a country to produce a specific
good at a lower opportunity cost that its
trading partners
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Production Possibilities
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Consumption/Trading Possibilities.
Arguments For Free Trade/Against
Protectionism
 Domestic prices will decrease
 Resulting in higher standard of living
 Higher
quality (increased
competition)
 Decrease in exports/trade war
 Increase in economic efficiency
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Distorts comparative advantage
Greater choice for consumers
 Economies of scale
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Why Restrict Trade/ Argument
for Protectionism
Not EVERYONE benefits from trade
 Protect domestic employment (short run)
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Protect against cheap foreign labor
 Prevent structural unemployment
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Protect National Defense (strategic
reasons)
 Protect infant industries (sunrise
industries)
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Protectionism Cont.
 Source
of government revenue
 Anti-dumping measures (tariff,
subsidy)
 Prevent over-specialization
 Protect product standards
 Correct balance of payments deficit
Protectionism:
Barriers to Trade
 Tariffs
 Quotas
 Embargoes
 Voluntary
Export Restraints
 Administrative obstacles
 Health and safety standards
 Environmental standards
Free trade diagram:
Identify:
 World supply
 Equilibrium price
 Equilibrium quantity
 Domestic production
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World production
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Domestic revenue
World revenue
Domestic consumption
Consumer surplus
Tariff Diagram
Identify:
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Equilibrium price
Equilibrium quantity
Domestic production
World production
Domestic consumption
Loss of consumer surplus
(dead weight loss)
Loss of economic
efficiency
Government revenue
World revenue
Subsidy diagram
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identify:
Equilibrium price
Equilibrium quantity
Domestic production
World production
Domestic consumption
Loss of consumer surplus
(dead weight loss)
Loss of economic efficiency
Government payment
World revenue
Quota diagram
Equilibrium price
 Equilibrium quantity
 Domestic production
 World production
 Domestic consumption
 Loss of consumer
surplus (dead weight
loss)
 Loss of economic
efficiency
 Government payment
 World revenue