Transcript Lecture 8 Dominika Milczarek

INTRODUCTION TO ECONOMICS
Beata Łopaciuk-Gonczaryk
Lecture 11
International Trade
Outline
1. Facts of International Trade
2. The Economic Basis for Trade
3. The Principle of Comparative Advantage
4. Trade Barriers
5. The Case for Protection: A Critical
Review
6. The World Trade Organization
2
Facts of International Trade:
Highlights
• Exports as a share of total output
• Trade deficit
• Free trade agreements (EU, NAFTA, etc.)
• Improved transportation and communication
has contributed to international trade since
WWII.
• U.S., Japan, Western Europe and China
dominate world trade,
• but substantial international trade form
South Korea, Taiwan, and Singapore.
3
GLOBAL PERSPECTIVE
Shares of World Exports, 2001
0
2
4
6
8
10
12
United States
Germany
Japan
France
United Kingdom
China
Canada
Italy
Source: World Trade Organization
4
GLOBAL PERSPECTIVE
Shares of World Exports, 2009
0
2
4
6
8
10
China
Germany
United States
Japan
Netherlands
France
Italy
Source: World Trade Organization, http://stat.wto.org
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The Economic Basis for Trade
• The rationale for trade:
– uneven distribution of economic resources
among nations
– efficient production of various goods
requires different technologies or
combinations of resources
– products are differentiated among nations
and some people prefer imported goods
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The Economic Basis for Trade
• Examples:
– Japan:
• has a large, well-educated labor force
• can specialize in labor-intensive commodities
– Australia:
• has an abundance of land relative to human
and capital resources and
• can cheaply produce land-intensive
agricultural products
– Industrially advanced nations:
• are in a position to produce capital-intensive
goods.
7
Production Possibilities Curve
For Each Country
45
Brazil
United States
40
30
Coffee (tons)
Coffee (tons)
35
25
20
15
(18, 12)
10
30
25
20
constant
cost
industries
15
10
A
5
5
(8, 4)
B
0
0
5
10
15
20
Wheat (tons)
25
30
5
10
15
20
Wheat (tons)
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Comparative Advantage
• Differing opportunity costs of producing
various goods and services
• Total output will be greatest when each
good is produced by the nation that has the
lowest opportunity cost for that good
• Example
– U.S has comparative advantage in wheat and
Brazil has comparative advantage in coffee
– after specialization there will be more coffee
and more wheat in total than the totals before
specialization
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Comparative Advantage
• Terms of trade
– The rate at which units of one product can be
exchanged for units of another product
– The amount of one good or service that must
be given up to obtain 1 unit of another good or
service
• in the U.S. 1 wheat = 1 coffee
• in Brazil 1 wheat = 2 coffee, so Brazil will not trade
more than 2 coffee for 1 wheat.
• the rate of exchange will be somewhere between 1
and 2 coffees for each wheat
• The actual TOT - country’s negotiating power and
world demand and supply conditions.
10
Trading Possibilities Lines –
the Gains From Trade
United States
45
Brazil
If the U.S.
chooses to
trade 10
tons of
wheat for
15 tons of
coffee
40
Trading
possibilities line
30
25
20
15
10
Coffee (tons)
Coffee (tons)
35
30
25
20
Trading
possibilities line
15
10
A
5
5
B
0
0
5
10
15
20
Wheat (tons)
25
30
5
10
15
20
Wheat (tons)
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Trading Possibilities Lines –
the Gains From Trade
United States
45
Brazil
40
Trading
possibilities line
30
25
20
A’ (20,15)
15
10
Coffee (tons)
Coffee (tons)
35
30
25
20
Trading
possibilities line
15
10
A
5
B’ (10, 5)
5
B
0
0
5
10
15
20
Wheat (tons)
25
30
5
10
15
20
Wheat (tons)
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Comparative Advantage
• The gains from trade
– Improved productivity of resources
– Added output
• Remark
– In reality increasing costs
– Complete specialization will probably not occur
with many products
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Comparative Advantage
• Through free trade, based on the principle
of comparative advantage, the world
economy can achieve a more efficient
allocation of resources and a higher level of
material well-being
• Free trade:
– promotes competition and deters monopoly
power
– specialization increases the production possibility
curve by raising the productivity of the resources
devoted to producing certain goods
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Trade Barriers
• Types of barriers:
– Tariffs
• taxes raising import prices
– Import quotas
• maximum amounts of imports allowed
– Nontariff barriers
• licensing requirements, unreasonable standards, or
bureaucratic red tape in customs procedures
– Voluntary export restrictions
• agreements by foreign firms to “voluntarily” limit their
exports to a particular country
15
Economic Impact of Tariff or Quota
16
Source: McConell and Brue 2005
Economic Impact of Tariffs
• Direct effects when tariff is imposed:
1. Domestic consumption declines as the price
rises to Pt
2. Domestic production rises because the price has
risen
3. Imports fall
4. Government tariff revenue represents a transfer
of income from consumers to government
• Indirect effect
–
–
Relatively inefficient industries are expanding
Relatively efficient industries abroad have been
made to contract
17
Economic Impact of Quotas
• Similar to tariffs, but
• No revenue is generated for the government
• Price rises to pt as with the tariff, but
– Revenue generated by the higher price goes to
foreign and domestic producers
• No possibility for consumers to obtain more
than the allowed quota
– Even at higher prices
18
The Case for Protection
1. Military self-sufficiency
–
–
National defense argument but
It is difficult to select strategic industries to
protect
2. Increasing domestic employment
–
Imports may eliminate some jobs, but they
create others in the sales and service industries
for these products
– The trading partner may be made weaker and
less able to buy the protectionist nation’s
products
– Trade wars
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The Case for Protection
3. Diversification for stability
–
–
–
protecting certain industries until they become
viable
does not apply to diversified economies
economic costs of diversification may be great
and not worth the protection
4. The infant-industry argument
–
–
–
–
new industries may need “temporary”
protection to gain productive efficiency but
difficult to determine which industries
protection may persist
direct subsidies may be preferable to
international protection
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The Case for Protection
5. Protection against “dumping”
–
–
the below-cost sales - a form of price discrimination
antidumping duties (tariffs)
6. Protection against competition from cheap
foreign labor
–
–
not valid
it is mutually beneficial for rich and poor to trade
with one another
• The infant-industry argument and the military
self-sufficiency argument may be justifiable on
political grounds
21
World Trade Organization
• Inefficiencies of protectionism - seeking
ways to promote free trade
• World Trade Organization
– GATT (1948-1994)
– 153 nations
• China from 2001
• Poland from 1995
– oversees provisions of agreement and resolves
disputes
– a protest target of groups who are against various
aspects of globalization
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Key Terms
•
•
•
•
•
•
•
•
•
•
•
labor-intensive goods
land-intensive goods
capital-intensive goods
cost ratio
principle of comparative
advantage
terms of trade
trading possibilities line
gains from trade
world price
domestic price
export supply curve
•
•
•
•
•
•
•
•
import demand curve
equilibrium world price
tariffs
revenue tariff
protective tariff
import quota
nontariff barrier (NTB)
voluntary export
restriction (VER)
• strategic trade policy
• dumping
• World Trade
Organization (WTO)
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