Slide 1

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 2

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 3

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 4

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 5

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 6

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 7

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 8

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 9

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 10

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 11

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 12

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 13

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 14

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 15

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 16

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin


Slide 17

C
H
A
P
T
E
R

32
International Trade and
Public Policy

Prepared by:
Fernando Quijano and Yvonn Quijano

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• If a nation produced everything it consumed, it
would depend on any other nation for its
livelihood.
• Although self-sufficiency sounds appealing,
countries are better off if they specialize in
some products and trade some of those
products with other nations for products that
your nation doesn’t produce.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Benefits from Specialization and Trade
• Specialization and trade are concepts based
on the principle of opportunity cost.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is what you
sacrifice to get it.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Output and Opportunity Cost
• The following table shows the daily output of
two goods for two nations:
Shirtland

Chipland

Shirts produced per day
Chips produced per day

108
36

120
120

Opportunity cost of shirts
Opportunity cost of chips

1/3 chip
3 shirts

1 chip
1 shirt

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• The production
possibilities frontier
shows the possible
combinations of two
goods that can be
produced by an
economy. It is the
Opportunity Cost of
one good in terms of
the other.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Shirtland, the
trade-off is three
shirts for every
computer chip.
Point
r
h

Shirtland
Shirts
Chips
108
0
54
18

s
t
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

24
0

28
36

O’Sullivan/Sheffrin

Production Possibilities Curve
• For Chipland, there is
a one-for-one tradeoff between the two
goods.

Point
b

Chipland
Shirts
Chips
120
0

c
d
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

60
0

60
120

O’Sullivan/Sheffrin

Comparative Advantage
and the Terms of Trade
• The nation with the lower opportunity cost has
a comparative advantage, which is the ability
of one nation to produce a particular good at
an opportunity cost that is lower than the
opportunity cost of another nation in producing
the same good.
• The terms of trade are the rate at which two
goods will be exchanged.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

The Consumption Possibilities Curve
• The consumption possibilities curve shows
the combinations of two goods that a nation
can consume when it specializes in producing
one good and trades with another nation.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Protectionist Policies
• Four common import-restriction policies are:
• An outright ban on imports.
• An import quota, or a limit on the amount of
a good that can be imported.
• Voluntary export restraints, where a nation
voluntarily decreases its exports in an
attempt to avoid more restrictive policies.
• A tariff, or a tax on imported goods.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Quotas and Voluntary
Export Restraints
• An import quota is a limit on the amount of a
good that can be imported.
• A scheme under which an exporting country
voluntarily decreases its exports is a
voluntary export restraint (VER).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Price Effects of VERs
for Japanese Cars
• Many European
nations use VERs
to limit the number
of Japanese cars
imported. The
VERs increase the
price of Japanese
cars.

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

NAFTA and the Giant Sucking Sound
• The North American Free Trade Agreement
(NAFTA) took effect in January 1999.
• NAFTA will gradually phase out tariffs and
other trade barriers between the United
States, Mexico, and Canada.
• Economists predicted that trade between the
United States and Mexico would increase
both imports from Mexico and exports to
Mexico.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Trade Data for the
United States and Mexico

Year

U.S. Imports
from Mexico
(billions)

U.S. Exports
to Mexico
(billions)

1993

$40

$42

3.12

$+2

1994

$49

$51

3.11

$+2

1995

$62

$46

5.33

$-16

© 2003 Prentice Hall Business Publishing

Exchange
U.S. Trade Surplus
Rate: Pesos (+) or Deficit (-) with
per Dollar
Mexico (billions)

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Rationales for Protectionist Policies
• Three possible motivations for policies that
restrict trade are:
• To shield workers from foreign competition.
• To nurture “infant” industries until they mature.
• Learning by doing is the knowledge gained during
production, resulting in increases in productivity.
• Infant industry is a new industry that is protected
from foreign competitors.

• To help domestic firms establish monopolies in
world markets.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Are Foreign Producers
Dumping Their Products?
• Dumping is a situation in which the price a
firm charges for a product in a foreign market
is lower than either the price it charges for that
product in its home market or the product’s
production cost.
• Why do firms dump?
• Price discrimination.
• Predatory pricing: cutting prices in an
attempt to drive rival firms out of business.
© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin

Recent Trade Agreements
• North American Free Trade Agreement
(NAFTA).
• World Trade Organization (WTO).

• European Union (EU).
• Asian Pacific Economic Cooperation (APEC).

© 2003 Prentice Hall Business Publishing

Economics: Principles and Tools, 3/e

O’Sullivan/Sheffrin