CHAPTER 17 International Trade

Transcription

1 Part Four: Microeconomics of Government and International Economics CHAPTER 17 International Trade 2010 McGraw-Hill Ryerson Ltd. Slides prepared by Bruno Fullone, George Brown College 1

2 In this chapter you will learn: 17.1 About specialization, comparative advantage, and international trade 17.2 About supply and demand analysis of exports and imports 17.3 About trade barriers and their negative effects on nations economic well-being Chapter 17 2

3 17.1The Economic Basis for Trade Why do nations trade? The distribution of resources is uneven Efficient production requires different technologies or resource combinations Products are differentiated as to quality and other non-price attributes LO

4 The Economic Basis for Trade Labour-intensive goods Land-intensive goods Capital-intensive goods LO

5 Specialization and Comparative The Basic Principle Advantage Specialization according to comparative advantage reduces costs Absolute advantage LO

6 Specialization and Comparative Advantage Two isolated nations (Canada and Brazil) 1. Constant Costs Straight-line production possibilities curves 2. Different Costs Different technology and resources 3. Canada Has Absolute Advantage in Both Steel and Soybeans LO

7 Soybeans (tonnes) Soybeans (tonnes) Production Possibilities Curve Canada A Figure steel 12 soybeans B Brazil 8 steel 4 soybeans Steel (tonnes) Steel (tonnes) LO

8 Specialization Based on Comparative Advantage Opportunity Cost Table Country 1 Steel Cost 1 Soybean Cost Canada 1 soybean 1 steel Brazil 2 soybeans.5 steel Who has the comparative advantage in steel? LO

9 Specialization Based on Comparative Advantage Opportunity Cost Table Country 1 Steel Cost 1 Soybean Cost Canada 1 soybean 1 steel Brazil 2 soybeans.5 steel Who has the comparative advantage in soy? LO

10 Terms of Trade What will the terms of trade be? Many possibilities For trade to be mutually beneficial the terms of trade must be between each nation s opportunity costs LO

11 Country 1 Steel Cost 1 Soybean Cost Canada 1 soybean 1 steel Brazil 2 soybeans.5 steel for example: Terms of Trade Opportunity Cost Table 1 steel for 1.5 soybeans gains from trade can be illustrated with trading possibilities line LO

12 Soybeans (tonnes) Soybeans (tonnes) Trading Possibilities Lines and the Gains from Trade Canada Steel (tonnes) 1.5 soy for 1 steel A Figure 17-2 Trading possibilities line Brazil.67 steel for 1 soy B Trading possibilities line Steel (tonnes) LO

13 Table 17-1 Comparative Advantage and the Gains from Trade LO

14 Improved Options Added Output Gains from Trade LO

15 Trade with Increasing Costs A more realistic model: Increasing opportunity costs Less than complete specialization LO

16 The Case for Trade Restated Through free trade based on the principle of comparative advantage, the world economy can achieve a more efficient allocation of resources and a higher level of material well-being than without free trade Side benefits: Promotion of competition; deterrence of monopoly Linking of national interests; reduction of national animosities LO

17 17.2 Supply and Demand Analysis of Exports and Imports When world prices increase relative to domestic prices, domestic exports will increase, resulting in an upward sloping export supply curve When world prices decrease relative to domestic prices, domestic imports will increase, resulting in a downward sloping import demand curve LO

18 Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) Canadian Export Supply and Import Demand Cdn. domestic aluminum market $ Figure 17-3 S d $ Cdn. export supply and import demand If the world price exceeds the Cdn. price by 25 cents D d LO

19 Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) Canadian Export Supply and Import Demand Cdn. domestic aluminum market S d Cdn. export supply and import demand $ SURPLUS = 50 $ EXPORTS = If the world price goes further up D d LO

20 Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) Canadian Export Supply and Import Demand Cdn. domestic aluminum market S d Cdn. export supply and import demand $ SURPLUS = 100 $1.75 EXPORTS = Cdn. export supply If world prices fall below $ D d LO

21 Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) Canadian Export Supply and Import Demand Cdn. domestic aluminum market S d Cdn. export supply and import demand $ $ Cdn. export supply SHORTAGE = 50 IMPORTS = D d LO

22 Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) Canadian Export Supply and Import Demand Cdn. domestic aluminum market S d Cdn. export supply and import demand $ $ Cdn. export supply SHORTAGE = IMPORTS = 100 Cdn. import demand D d LO

23 Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) U.S. Export Supply and Import Demand U.S. domestic aluminum market Figure 17-4 S d U.S. export supply and import demand $ SURPLUS = 100 EXPORTS = 100 $1.50 SURPLUS = 50 EXPORTS = SHORTAGE = 50 IMPORTS = SHORTAGE = 100 IMPORTS = 100 D d U.S. export supply U.S. import demand LO

24 Price (per kg. Cdn. dollars) Figure 17-5 Equilibrium World Price and Quantity of Exports and Imports World price is where: U.S. export supply = Cdn. import demand e U.S. import demand Cdn. export supply U.S. export supply Cdn. import demand LO

25 Equilibrium World Price, Exports, and Imports International equilibrium occurs when one nation s import demand curve intersects another nation s export supply curve Americans will pay more for aluminum with trade than without it Americans are willing to export aluminum to Canada because they can gain from the trade (to import other goods) Canadians pay less for aluminum with trade; Canadians gain from the trade LO

26 Tariffs 17.3 Trade Barriers Revenue tariffs Protective tariffs Import Quotas Nontariff Barriers (NTBs) Voluntary Export Restraints (VERs) LO

27 Price The Economic Effects of a Tariff or Quota Figure 17-6 S d S d + Q P d P t P w D d 0 LO 17.3 a b q c d Quantity 27

28 Economic Impact of Tariffs Direct Effects: Decline in Consumption Increased Domestic Production Decline in Imports Tariff Revenue Indirect Effects: Expansion of inefficient industries at the expense of relatively efficient ones LO

29 Economic Impact of Quotas The same, without the tariff revenue for the government Foreign firms reap the benefit of higher prices LO

30 Net Costs of Tariffs and Quotas Consumer costs Price of imported product goes up Some consumers shift purchases from imports to higher-priced domestic goods Prices of domestic goods rise Gains to protected industries and workers come at the expense of much greater losses for the entire economy LO

31 The Last Word: Fair Trade Products Fair Trade Standards set up to help keep dominant sellers from low income countries from keeping most of the proceeds More is paid to producers if more is paid to workers Economists question approach as an economic development strategy Economists agree that some of the efforts of fair-trade advocates have succeeded in channeling sizable purchases away from otherwise identical substitutes and toward fairtrade goods. Removal of agricultural subsidies may be a better tool Chapter 17 31

32 Chapter 17 Summary 17.1 The Economic Basis for Trade The Law of Comparative Advantages 17.2 Supply and Demand Analysis of Exports and Imports 17.3 Trade Barriers Chapter 17 32