Isues in economics today 6th by guell chapter17

Chapter 17
International
Trade:
Does It
Jeopardize
American
Jobs?
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Chapter Outline
•
•
•
•
•

What We Trade And With Whom
The Benefits From Trade
Barriers To Trade
Trade As A Diplomatic Weapon
Kick it Up and Notch: Costs of
Protectionism

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Exports and Imports
As a percentage of GDP

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What We Trade: Exports
(2009)
Good
Elec. Mach. Aud &
Video
Motor Vehicles
Transportation
Equipment
Petroleum
Industrial Mach.
Services
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Billions of Dollars of
Exports
105.0

95.0
84.0
62.7
56.5
503.0
1,780.5

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What We Trade: Imports (2009)
Good

Billions of Dollars of
Imports

Petroleum
Motor Vehicles
Telecommunication Eq
Elec. Mach. Aud & Video
Office Machines
Services
Total
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329.6
179.1

137.3
119.7
113.5
370.0
2,282.1

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With Whom We Trade

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Comparative and Absolute
Advantage
• Absolute Advantage: the
ability to produce a good better,
faster, or more quickly than a
competitor
• Comparative Advantage: the
ability to produce a good at a

lower opportunity cost of the
resources used
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The Benefits of Trade: When
Comparative and Absolute
Advantage are the same

Suppose there are two countries, the United States and
Brazil, and two goods, Apples and Coffee, and the
production per unit of labor is shown in the table below.

United
States
Brazil

Coffee
1

Apples
2

2

1

Clearly, there are benefits from trade. If the Americans focus
on apples and the Brazilians focus on coffee and they trade
with one another, more apples and more coffee is available to
both countries.
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The Benefits of Trade: When
Comparative and Absolute
Advantage are Not the Same

Now suppose the Americans are better at producing both
goods. The Americans have an absolute advantage in both
but a comparative advantage in only Apples.

United
States
Brazil

Coffee
3

Apples

2

2

1

There are still benefits from trade. If the Americans focus on
apple production and the Brazilians focus on coffee production
and they trade with one another more apples and coffee is
available to both countries.
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Terms-of-trade
• The amount of a good one
country must give up in
order to obtain another good
from the other country,
usually expressed as a ratio.

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Using Production Possibilities
Frontiers
Apples

Brazil

United States
Apples

Production
Possibilities Frontier
Production Possibilities Frontier

Coffee
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Coffee

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Consumption Possibilities
Frontier with Trade
Apples

Consumption Possibilities Frontier

Coffee
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Reasons For Limiting Trade
That Many Economists Support
• National Security
• National Identity
• Both of the above can be
overstated easily.

• Environmental Concerns
• Child-Labor Concerns
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Reasons for Limiting Trade that
Most Economists Do Not Support

• To protect industries from
competition
• To temporarily aid an industry that is
just emerging.
• To protect an industry from
competition that is dumping (the
exporting of goods below cost so as
to drive competitors out-of-business)
its products in the US.

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Methods of Limiting Trade
• Tariffs: a tax on imports
• Quotas: a legal restriction
on the amount of a good
coming into the country
• Non-tariff barriers:
barriers to trade that result
from regulatory actions
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Cost of Limiting Trade
Domestic Market

P

S

P

World Market

A
S

Pdomestic
Pworld

F

C

B

Q’s Q Q’d
d

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Pworld

E

D

D

Q/t

Q/t

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Tariffs vs. Quotas
P
S’

A

Plimit

F

P*
C

}

Tariff

B

E

S

Limiting trade with a quota
Limiting trade with a tariff
A tariff raises tax revenue and
a quota does not.
D

Qlimit Q*
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Q/t
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Costs of Protection

• Whether there is a quota or a tariff there
is deadweight loss. This means that the
gainers (the people who keep their jobs)
gain less than the losers (the people who
have to pay higher prices) lose.
• The average cost per job saved via trade
barriers is estimated to be $169,000 per
year.

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Trade as a Diplomatic Weapon
• Trade sanctions have failed
• To get Castro out of Cuba.
• To get Iran to release our
hostages in 1979-1980.
• To get the Soviet Union out of
Afghanistan.
• To get Iraq out of Kuwait in 1990.

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