Transcript Chapter 35 INTERNATIONAL TRADE AND COMPARATIVE ADVANTAGE

2
International Trade and
Comparative Advantage
No nation was ever ruined by trade.
BENJAMIN FRANKLIN
Contents
● Why Trade?
● International versus Intranational Trade
● The Law of Comparative Advantage
● Tariffs, Quotas, and Other Interferences
with Trade
● Guest Lecture: Turkey's Comparative
Advantage in Trade
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Why Trade?
● Reasons countries benefit from foreign trade
♦ They can import resources they lack at home.
♦ They can import goods for which they are a
relatively inefficient producer.
♦ Specialization sometimes permits economies of
large-scale production.
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Why Trade?
● Mutual Gains from Trade
♦ When trade is voluntary:
■Both sides must expect to gain from it
■Otherwise, they would not trade
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International versus
Intranational Trade
● Why international trade is studied
separately:
♦ Countries are governed by separate
governments
♦ International trade involves the exchange of
national currencies
♦ Labor and capital are less mobile
internationally than they typically are within a
country
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Absolute Advantage
● One country has an absolute advantage
over another in the production of a
particular good if it can produce that good
using smaller quantities of resources than
can the other country.
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The Law of Comparative
Advantage
● One country has a comparative advantage
over another in the production of a
particular good if it produces that good less
inefficiently than the other country.
● Less inefficiently = with lower opportunity
costs
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The Law of Comparative
Advantage
● The law of comparative advantage applies
even if one country is at an absolute
disadvantage relative to another country in
the production of every good.
● Both countries gain from trade even if one
of them is more efficient than the other in
producing everything.
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The Law of Comparative
Advantage
● The Arithmetic of Comparative Advantage
♦ When countries differ in the relative efficiency
with which they produce different goods:
■Both world output and the welfare of each country
can be increased if:
● Each country specializes in producing the goods for
which it has a relative advantage;
● And then trades with the other.
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2: Alternative Outputs
from One Year of Labor Input
TABLE
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Gains from Trade: An Example
● Suppose U.S. produce only Televisions
Table 3
♦ Then there are 50 made
Example of the Gains from Trade
● And Japan only produces Computers
U.S.
♦ So there is a total of 10
Japan
●Computers
Now they reallocate
+ 25 production:
− 10
♦ U.S. produce 25 TVs and 25 PCs
Televisions
− 25
+ 40
♦ Japan produces 40 TVs and 0 PCs
Total
+15
+15
● What happens with total production?
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Calculating Opportunity
Costs for U.S.
● Suppose U.S. produce only TVs
♦ If so, they produce 50
● Now they want 1 PC
● How many televisions must give up
producing?
♦ Exactly 1, so now produce 1 PC and 49 TVs
● Costs of making 1 PC is 1 TV that we don’t
produce – that’s opportunity costs!
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Calculating Opportunity
Costs for Japan
● Suppose Japan produces only TVs
♦ If so, they produce 40
● Now they want 1 PC
● How many TVs must give up producing?
♦ 4, so now produce 36 TVs and 1 PC
● Costs of making 1 PC is 4 TV sets they do
not produce – that’s opportunity costs!
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Opportunity Costs Computed
Table 4
Opportunity Costs
U.S.
Japan
Computers
1 unit of TVs
4 units of TVs
Televisions
1 unit of PCs
¼ units of PCs
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© 2006
2006
South-Western/Thomson
Southwestern/ThomsonLearning.
Learning All rights reserved.
Exchange Price
● What (relative) price will prevail?
♦ Need a more complicated model to answer
♦ But can say something here!
● Let p be the relative price of PCs
♦ If p < 1, U.S. won’t sell PCs
♦ If p > 4, Japan won’t buy PCs
● So p is between 1 and 4
● Assume p =2
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The Law of Comparative
Advantage
● The Graphics of Comparative Advantage
♦ Production possibilities frontiers for two
countries can show:
■Different opportunity costs
■The potential gains from trade
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1: Per-Capita PPFs for
Two Countries
FIGURE
60
U
Television Sets
(millions)
50
J
40
U.S. production
possibilities frontier
30
Japanese
production
possibilities
frontier
20
10
N
0
10
S
20
30
40
50
60
Computers
(millions)
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FIGURE
2: The Gains from Trade
90
90
80
80
70
70
60
50
J
40
Japanese consumption
possibilities
30
Japanese production
possibilities
20
10
Television Sets
100
Television Sets
100
60
U
50
D
A
40
U.S. consumption
possibilities
30
U.S. production
possibilities
20
10
N
0
10
P
20
S
30
40
50
60
0
10
20
30
40
50
60
Computers
Computers
(a) Japan
(b) United States
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Tariffs, Quotas, and Other
Interferences with Trade
● Countries can reduce imports by setting
tariffs or quotas.
♦ Tariff – like a per-unit tax on the good traded
♦ Quota – limit on the quantity traded
● They can promote exports by subsidizing
export goods.
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Why Inhibit Trade?
●Reasons why countries may restrict
trade:
♦ Gain a price advantage
♦ Protect particular industries (infant
industry argument)
♦ National defense and other non-economic
reasons
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4: Estimated Costs of
Protectionism to Consumers
TABLE
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© 2006
2006
South-Western/Thomson
Southwestern/ThomsonLearning.
Learning All rights reserved.
Trade is Beneficial
● Under most circumstances, international
trade enhances our standard of living.
● There are always winners and losers
♦ But winners usually win more than losers lose
● So trade is beneficial
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The End
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