CHAPTER DYNAMIC POWERPOINT SLIDES BY SOLINA LINDAHL. International Trade

Transcription

1 CHAPTER 9 DYNAMIC POWERPOINT SLIDES BY SOLINA LINDAHL International Trade

2 CHAPTER OUTLINE Analyzing Trade with Supply and Demand The Costs of Protectionism Arguments against International Trade For applications, click here To Try it! questions To Video 2

3 Food for Thought. Some good blogs and other sites to get the juices flowing: 3

4 Analyzing Trade with Supply and Demand We can use the demand and supply model to determine: The effects of free trade on: Domestic equilibrium price and quantity Imports The effects of trade barriers on: Domestic equilibrium price and quantity Imports

5 Analyzing Trade with Supply and Demand Price Domestic supply with free trade: World price prevails. Domestic consumption = Domestic production = imports = No trade equilibrium P no trade Free trade equilibrium World supply World price Domestic consumption Imports Domestic production Domestic demand Quantity of semiconductors

6 Analyzing Trade with Supply and Demand Price With Tariff: World price + tariff prevails. Domestic consumption= Domestic production = Domestic supply imports = tariff revenue Equilibrium with tariff pno trade World price + tariff World supply + tariff tariff World Supply World price Imports w/ free trade Domestic consumption Domestic demand Quantity of semiconductors Domestic production Imports w/tariff

7 Try it! A tariff results in a higher: I. consumer surplus. II. producer surplus. III. government revenue. a)i and II only b)ii and III only c)i and III only d)i, II, and III To next Try it!

8 The Costs of Protectionism Protectionism = policy of restraining trade through quotas, tariffs, or other regulations which burden foreign (but not domestic) producers. Tariff = a tax on imports Trade Quota = a restriction on the quantity of goods that can be imported: imports greater than the quota amount are forbidden (or heavily taxed.) 8

9 The Costs of Protectionism A tariff has two effects: 1. domestic production, domestic consumption. More of the good is produced by the higher-cost domestic producers. 2. Less is consumed lower gains from trade. Measuring the losses and wasted resources Can we measure the value of wasted resources? Yes!

10 The Costs of Protectionism Price per pound (in cents) Domestic demand Domestic supply World supply + tariff 20 Tariff equilibrium U. S. costs Lost gains from trade or deadweight loss Wasted resources World price World supply 9 Free trade equilibrium World costs Quantity (in billions of pounds)

11 The Costs of Protectionism Price per pound (in cents) Domestic demand Domestic supply World supply + tariff 20 Value of wasted resources = [(.20.09) x 20]/2 = $1.1 billion Lost gains from trade = [( ) x (24 20)]/2 = $.22 billion $1.1 billion World price World supply Quantity (in billions of pounds)

12 The Costs of Protectionism Conclusions: A tariff reduces economic efficiency: Low-cost producers are prevented from selling. Mutually profitable gains from trade are prevented by law. U.S. consumers pay more, and workers in other countries (many of whom are poor) lose income.

13 Try it! A $1 tariff results in: a)an increase in imports of 80 million units. b)a decrease in imports of 80 million units. c)an increase in imports of 100 million units. d)a decrease in imports of 100 million units. To next Try it!

14 The Costs of Protectionism One final cost: lobbying The loss to domestic consumers is greater than the gains to domestic producers. Why does congress pass tariffs? Small number of producers Benefit per producer is high. Large number of consumers Loss per consumer is low.

15 Arguments Against International Trade Most Common Arguments 1. Trade reduces the number of jobs in the U.S. 2. It s wrong to trade with countries that use child labor. 3. We need to keep some industries for reasons of national security. 4. We need to keep some key industries because of beneficial spillovers onto other sectors. 5. We can increase U.S. well-being with strategic trade protectionism.

16 Try it! Which argument against trade is the strongest in your opinion? a)trade reduces the number of jobs in the U.S. b)it s wrong to trade with countries that use child labor. c)we need to keep some industries for reasons of national security. d)we need to keep some key industries because of beneficial spillovers onto other sectors. e)we can increase U.S. well-being with strategic trade protectionism.

17 Rebuttals Trade and Jobs Tariffs raise the price of protected goods. Consumers have less money to spend on other goods. Jobs are lost in other industries these lost jobs are hard to see. Trade creates jobs The U.S. dollars we spend on other country s good are often used to buy our goods. Jobs are created in U.S. exporting industries. 17

18 Rebuttals Child Labor Restricting imports made by child labor may do more harm than good. Children work out of necessity what else will they do? Often the alternative is worse. Prostitution Scrounging in refuse dumps Child labor is a poverty problem, not a trade problem. 18

19 Poverty and Child Labor Source: Edmonds, E. and N. Pavcnik, Child Labor in the global economy Journal of Economic Perspectives

20 Rebuttals Trade and National Security True: Some industries probably should be ii think I am protected to protect National vital Security. to your security. No BUT: This is subject to great abuse almost kidding. every industry can make this argument for protection. Examples: Vaccine production? probably a good idea. Angora Goat fleece?--are you kidding? No. This is protected.

21 Rebuttals Key Industries Some industries are characterized by large spillovers to other industries (and should be encouraged). Example: Computer chips have spillover benefits that go beyond the computer chip industry BUT: Subsidy (to chip makers) is a better option than a tariff. Tariff would be second-best. Hard to determine which industries are key.

22 Rebuttals Strategic Trade Protectionism = Government helps domestic firms act like a cartel when they sell to international buyers. May be able to grab up a larger share of the gains from trade than with free trade. This is done by forcing other countries to pay MORE for your goods, usually with an export tax. Will the exporting country see more revenue? Success depends on Price Elasticity of Demand. OPEC succeeds because oil has few substitutes. If the U.S. taxes car exports, it may just encourage foreigners to switch to a substitute good (Japanese cars, for instance).

23 At TEDIndia, TED favorite Hans Rosling gives another lively and humorous talk- and graphs global economic growth since He also predicts the exact date that India and China will outstrip the US. (15:50 minutes)

24 SEE THE INVISIBLE HAND Globalization is not new Phoenicians: 1550 B.C. Traders Roman Empire: 753 B.C. Specialization and Trade Collapse of trade networks? 476 A.D. Dark Ages Revitalized trade routes? 1300s European Renaissance Periods of increased trade and the spread of ideas have been among the best for human progress. 24