macroeconomic mcgrowhill micro ch 23 19e use this one

Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier
Trade Adjust
ment Assista
nce
Last Word

Key Terms
End Show
23-1

23
International
Trade
Copyright 2008 The McGraw-Hill Companies


Chapter Objectives
Some Key Fa
cts
The Economic
Basis for T

rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier
Trade Adjust
ment Assista
nce
Last Word

Key Terms
End Show
23-2

• The Graphical Model of Comparative
Advantage, Specialization, and the
Gains From Trade
• How Differences Between World Prices
and Domestic Prices Prompt Exports
and Imports
• How Economists Analyze the Economic
Effects of Tariffs and Quotas
• The Rebuttals to the Most Frequently
Presented Arguments for Protectionism
• About the Assistance Provided Workers
Under the Trade Adjustment Act of 2002
• How the Offshoring of U.S. Jobs Relates
to the Growing International Trade in

Services
Copyright 2008 The McGraw-Hill Companies


Some Key Trade Facts

• U.S. trade deficit in goods
• $517 billion in 2009
• U.S. trade surplus in services
• $138 billion in 2009
• Canada largest U.S. trade partner
• Trade deficit with China
• $220 billion in 2009
• Exports are 13% U.S. output
• Dependence on oil
LO1

23-3


Some Key Facts
Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import

s
Trade Barrier
Trade Adjust
ment Assista
nce
Last Word

Key Terms

• U.S. Sizable Trade Deficit with
China
• U.S. Dependence on Oil is
Reflected
• U.S. has World’s Highest Trading
Volume (Exports and Imports)
• China a Major Trade Force
• International Trade Links World
Economies
• International Trade is the Center
of Policy Debates

End Show
23-4

Copyright 2008 The McGraw-Hill Companies


Some Key Trade Facts

• Principal U.S. exports include:

• Chemicals
• Agricultural products
• Consumer durables
• Semiconductors
• Aircraft
• U.S. provides about 8.5% of world’s exports

LO1

23-5


Some Key Trade Facts

LO1

23-6


Some Key Facts
Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s

Trade Barrier
Trade Adjust
ment Assista
nce
Last Word

Key Terms

Shares of World Exports,
Selected Nations
GLOBAL PERSPECTIVE
Percentage Share of World Exports, 2004
0

Germany
United States
China
Japan
France
Netherlands
Italy
United Kingdom

2

4

6

8

10

10.0
8.9
6.5
6.2
4.9
3.9
3.8
3.8

End Show
Source: World Trade Organization
23-7

Copyright 2008 The McGraw-Hill Companies

12


Some Key Trade Facts

LO1

23-8


Economic Basis for Trade

• Nations have different resource
•
•
•

LO2

endowments
Labor-intensive goods
Land-intensive goods
Capital-intensive goods

23-9


Comparative Advantage

• Assumptions
• Two nations
• Same size labor force
• Constant costs in each country
• Different costs between countries
• U.S. absolute advantage in both

• Opportunity cost ratio
• Slope of the curve
• Wheat sacrificed per ton of Coffee
LO2

23-10

The Economic Basis for Trade
(a) United States

Trade Adjust
ment Assista
nce
Last Word

45

40

40

35

35

30

30
25

25

20

20

15

15
12
10

A

10
5
4

5
Key Terms

0
End Show

5

10

15 18 20

Wheat (Tons)
23-11

(b) Brazil

Coffee (Tons)

Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier

Coffee (Tons)

45

Copyright 2008 The McGraw-Hill Companies

25

30

0

B
5

8 10

15

Wheat (Tons)

20


The Economic Basis for Trade
Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier
Trade Adjust
ment Assista
nce
Last Word

• Self-Sufficiency Output Mix
• Specializing Based on
Comparative Advantage
– Principle of Comparative
Advantage

• Terms of Trade

– 1W ≡ 1C in the U.S.
– 1W ≡ 2C in Brazil

• Gains from Trade
• Trading Possibility Line
– Improved Options
– Added Output

Key Terms
End Show
23-12

Copyright 2008 The McGraw-Hill Companies

W23.1


Comparative Advantage

• Gains from trade
• Trading possibilities line
• Slope equals terms of trade
• Improved options
• Complete specialization
• More of both goods
• More efficient resource allocation
LO2

23-13


The Economic Basis for Trade
(a) United States

45

40

35
30

Trading
Possibilities Line

C

20

20

A’

15
12
10

A

c

10

B’

5
4

Key Terms

W
5

10

15 18 20

Wheat (Tons)
23-14

Trading
Possibilities Line

15

5

End Show

30
25

25

0

35

Coffee (Tons)

Trade Adjust
ment Assista
nce
Last Word

C’

40

Coffee (Tons)

Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys

is of Export
s and Import
s
Trade Barrier

(b) Brazil

45

Copyright 2008 The McGraw-Hill Companies

25

30

0

B
5

w w’
8 10

15

Wheat (Tons)

20

The Economic Basis for Trade
Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier
Trade Adjust
ment Assista
nce
Last Word

• Trade with
Increasing Costs
(curve would be concave,
not linear)

• The Case for Free
Trade

Key Terms
End Show
23-15

Copyright 2008 The McGraw-Hill Companies

Supply and Demand Analysis
of Exports and Imports
Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier
Trade Adjust
ment Assista
nce
Last Word

• World Price
• Domestic Price
• Supply and Demand in
the United States
–U.S. Export Supply
• Export Supply Curve

–U.S. Import Demand

Key Terms

• Import Demand Curve

End Show
23-16

Copyright 2008 The McGraw-Hill Companies


Supply and Demand Analysis
of Exports and Imports
(a) U.S. Domestic
Aluminum Market
Surplus = 100

Sd

1.50

1.50

Surplus = 50

1.00

1.00

.75

Shortage = 50

.50
0

50

75

100

125

Quantity of Aluminum
(Millions of Pounds)

End Show
23-17

c

1.25

1.25

Copyright 2008 The McGraw-Hill Companies

b

U.S.
Export
Supply

a

.75

x

U.S.
Import
Demand

.50

y

Dd

Shortage = 100
Key Terms

(b) U.S. Export Supply
and Import Demand
Price (Per Pound; U.S. Dollars

Trade Adjust
ment Assista
nce
Last Word

U.S. Aluminum Market

Price (Per Pound; U.S. Dollars

Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier

150

0

50

100

Quantity of Aluminum
(Millions of Pounds)


Supply and Demand Analysis
of Exports and Imports
(a) Canada’s Domestic

Aluminum Market

1.50

1.50

Surplus = 100

Sd

1.25

1.25

Surplus = 50

.75

.50
0

50

75

100

Dd

125

Quantity of Aluminum
(Millions of Pounds)

End Show
23-18

s

1.00

1.00

Shortage = 50
Key Terms

(b) Canada’s Export Supply
and Import Demand
Price (Per Pound; U.S. Dollars

Trade Adjust
ment Assista
nce
Last Word

Canadian Aluminum Market

Price (Per Pound; U.S. Dollars

Some Key Fa

cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier

Copyright 2008 The McGraw-Hill Companies

150

.75

r
a

.50

t
0

Canadian
Export
Supply

50

Canadian
Import
Demand
100

Quantity of Aluminum
(Millions of Pounds)


Supply and Demand Analysis
of Exports and Imports

Trade Adjust
ment Assista
nce
Last Word

World Market for Aluminum
Equilibrium World Price and
Quantity of Exports and Imports
Price (Per Pound; U.S. Dollars

Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys

is of Export
s and Import
s
Trade Barrier

U.S.
Export
Supply

1.00
.88

Canadian
Export
Supply

e

Equilibrium

U.S.
Import
Demand

.75

Canadian
Import Demand
0

Key Terms

50

100

Quantity of Aluminum
(Millions of Pounds)

End Show
23-19

Copyright 2008 The McGraw-Hill Companies

W23.2


•
•
•
•
•
LO4

Trade Barriers and Export
Subsidies
Tariffs
• Revenue tariff
• Protective tariff
Import quota

Nontariff barrier (NTB)
Voluntary export restriction (VER)
Export subsidy

23-20


Economic Impact of Tariffs

• Direct effects
• Decline in consumption
• Increase in domestic production
• Decline in imports
• Tariff revenue
• Indirect effects

LO4

23-21


Economic Impact of Quotas

• Decline in consumption
• Increase in domestic production
• Decline in imports
• Quotas do not provide for any
government revenue but instead
transfer it to foreign producers

LO4

23-22


Trade Barriers

Trade Adjust
ment Assista
nce
Last Word

Sd
Sd + Q

Price

Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier

Economic Effects of a Protective

Tariff or an Import Quota

Pd
Pt
Pw

Dd

Key Terms

0
End Show

a

b

Q

c d

Quantity
23-23

Copyright 2008 The McGraw-Hill Companies


Consider Tariff Impact
Some Key Fa
cts

The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier
Trade Adjust
ment Assista
nce
Last Word

Key Terms

• Example of tariff gone awry:
Water Intensive California Rice
(shortage of water and uncertain
future of meeting water needs).
“The U.S. government supports
domestic rice production through
tariffs on imported rice and direct
taxpayer subsidies based on
production, prices, and historical
acreage”..

End Show
23-24

Copyright 2008 The McGraw-Hill Companies


Trade
Barriers
• The Case for Protection: A Critical
Some Key Fa
cts
The Economic
Basis for T
rade
Supply and D
emand Analys
is of Export
s and Import
s
Trade Barrier
Trade Adjust
ment Assista
nce
Last Word

Review

– Military Self-Sufficiency Argument
– Diversification-for-Stability
Argument
– Infant Industry Argument
• Counterarguments
• Strategic Trade Policy

– Protection-Against-Dumping
Argument
• Dumping

– Increased Domestic Employment
Argument

Key Terms

• Smoot-Hawley Tariff Act

End Show

– Cheap Foreign Labor Argument
23-25

Copyright 2008 The McGraw-Hill Companies