Download Trade restrictions

Chapter 17 – Gaining from
International Trade
Chapter Learning Objectives:
1. Realize the size and growth of US Trade
2. Recognize why specialization and trade generates gains
(wealth)
3. Apply Supply & Demand analysis to international trade
4. Describe types of trade barriers and their effects
5. Recognize reasons for implementing trade restrictions
6. Clear up any misconceptions about international trade
PRS
Shipping jobs overseas
(outsourcing) is bad for the
American economy.
1. I agree with that statement
2. I disagree with that statement
Foreign aid to very poor nations from
more developed nations is an
economically effective cure for
poverty.
1. I agree with this statement.
2. I disagree with this statement.
A negative balance of trade
(imports > exports) is a bad
thing.
1. I agree with that statement.
2. I disagree with that statement.
Sweatshops should be forced to
pay higher wages and maintain
better working conditions.
1. I agree with that statement
2. I disagree with that statement.
Where does trade come from?
Surplus
Shortage
Without international trade, what would we do with
shortages and surpluses?
WITH international trade, what do we do
with shortages and surpluses?
VIDEO—Sweatshops
Highlights of “sweat shop” video:
• Protesters shouting “Union shop, not
sweat shop!” Why?
• People who work in sweatshops: their
generation lives better than previous
generations or worse lives?
• Nike pays 2 times what local factories pay
and 3 times what local farmers make for
much harder work
• Do most of the people who work in the
sweatshops feel exploited by the rich
American countries?
Highlights of “sweat shop” video:
• No, they start in sweatshops, move on to
better jobs
Sweatshops, con’t
• Insisting on higher wages closes factories,
eliminating jobs to the poor people of that
community.
• Walmart cancelled their contract with
Kathy Lee’s factory in Honduras.
Hundreds of jobs were lost.
• Unicef reports: when factories close,
instead of young girls being better off,
many must turn to prostitution (Hence John
Stossel’s comment about clueless, rich Americans)
Conclusions:
• Good intentions don’t always make good
policies. (In this case, the college
students who were protesting to increase
wages in sweatshops.)
U.S. in late 1800s (during the second (U.S) industrial
revolution), what kinds of jobs did we have?
• Moved from farms to cities
• Mines, factories, industrial
• Increase in disease, overcrowding
• BUT…..this led to increases in
transportation (intercontinental RR),
communication (telegraph), better ways of
farming (cotton gin)
• Is this another example of “creative
destruction?”
Who are we to say that other
nations can’t go through what
we did and end up in the same
place we are now – the richest
nation on the face of the earth?
Part time jobs…do they teach you anything? What you
are learning now, you will take with you to your
profession – worth ethic, getting along with people,
taking direction, training others…this is what
developing nations are doing now. LEARNING.
What do trade restrictions do?
• Decrease quantity
• Increase prices
• Create deadweight loss to society
– Besides, higher prices and lower quantity,
Eliminates the gains from trade, factories
close, unemployment increases, income
decreases and they can’t buy from US.
(PMA) Trade restrictions :
1. Decrease quantity to consumers
2. Increase prices to consumers
3. Create a deadweight loss to society
from loss of exchange
4. All of the above
Who benefits from trade restrictions?
• Protected industries
Who asks for trade restrictions?
• Protected industries –
• For example: banking industry & zero
interest rate on checking accounts
• Buggy Whip manufacturers lobbying to
stop the manufacturing of automobiles
Who benefits from trade restrictions?
• Protected industries
Who asks for trade restrictions?
• Protected industries
Who is worse off for trade restrictions?
1. U. S. Consumers
2. Foreign Consumers
3. Foreign producers
4. U.S. Exporters
Types of trade restrictions
• Tariff on imports
– Raises the price of imports so Qd will decrease
– Reduces imports
– Generates income for Gov’t (small)
• Quotas – limits physical no. of units that
can be imported
--Same effects as tariffs, but generates NO revenue for
U.S. Government.
--Embargos (the ultimate quota).
PRS
PMA: Which of the following would be
expected if tariffs on foreign produced
autos INCREASED?
1. Demand for foreign autos increase,
causing price of autos to increase in
other nations
2. No. of unemployed workers in the
domestic auto industry would rise.
3. Domestic price of autos would decrease.
4. Quantity demanded for foreign autos in
the domestic market would decrease
Popular Trade Fallacies:
1. Foreign Aid will reduce poverty in other
countries
Analogy:
• If I GIVE you all an A. Are you smarter? I
can give you a grade but are you better
off in terms of knowledge? …..or
• Give a man a fish and he eats today …
teach him to fish and he eats for a lifetime
Foreign aid to very poor nations from
more developed nations is an
economically effective cure for
poverty.
1. I agree with this statement.
2. I disagree with this statement.
Video—Foreign Aid
Survey ? – Bono and Angelina Jolie
are right – The best way to cure
poverty in our lifetime is for the U.
S. and other developed nations to
increase foreign aid to very poor
nations.
1. I agree with this statement.
2. I disagree with this statement.
PMA: What was the cure for
poverty in Hong Kong?
1. Increased foreign aide
2. Secure property rights
3. Democracy
4. Low marginal tax rates
5. Less intrusive government (small G
as a % of GDP)
Who is Stossel referring to when
he calls them “kleptocrats”?
1. People like Bono who want government
2.
3.
to force everyone to donate through
taxes
Corrupt government officials who steal
foreign aid money to use for their own
benefit
People who go to a foreign country and
set up businesses that exploit the poor of
that country
Which of the following provides
the foundation of the case for free
trade?
1. the law of diminishing marginal
utility
2. the anti-dumping argument
3. the industrial diversity argument
4. the law of comparative advantage
The Fallacy is:
3. Outsourcing jobs is a
zero sum game.
2 PRS questions:
Shipping jobs overseas is bad
for the American economy.
1. I agree with that statement
2. I disagree with that statement
When an American company
outsources part or all of its
production, overall employment
falls in the U. S. and rises in the
foreign country.
1. I agree with that statement
2. I disagree with that statement
VIDEO—outsourcing
In the case of the Levi’s factory, some
workers lost their jobs in the short run
but were able to retrain for BETTER
jobs in the long run. Economists refer
to this as:
1. Creative destruction
2. The fallacy of composition
3. Diminishing marginal utility
4. Union bashing
• According to John Stossel’s research,
outsourcing creates more jobs in
America than it loses.
• A Dartmouth study by Matt Slaughter
found U. S. companies that employ 2.8
million foreigners (by outsourcing)
increase employment in the U. S. parent
firm by 5.5 million.
• In other words, for every one job
outsourced, almost 2 jobs are created in
the U. S.
PRS
WSJ, May 27, 2004, Pg. A20 “Outsourcing”
Thus, from chapters 16 and 17 we find
that it’s institutions and policies of an
economy that determine the growth
and prosperity of a nation.
Among those institutions are
smaller government,
free trade and
protection of property rights
Ireland—pre 1987
• Government was large as a percent
of GDP and was increasing
• Marginal tax rates were high
• Monetary policy was erratic
• By 1987, Ireland’s economy was on
the verge of collapse
– Unemployment > 17%
– Real GDP was declining rapidly
– People were fleeing the country looking
for opportunities elsewhere
What would you think the
growth rate of GDP
in Ireland would be given
those institutions and
policies?
IRELAND:
Annual Growth Rate of REAL GDP
But Ireland
decided they
wanted to do
something
about their
stagnant
growth and
create an
environment
where citizens
would NOT
flee the
country
looking for
opportunity.
CW 17.2:
If you
were an
economic
advisor,
what
would YOU
advise
Ireland to
do?
1982-1987
In response to the economic crisis, Ireland sharply
decreased the level of GOVERNMENT SPENDING as a
percent of GDP from a high of almost 55% to 32% of
GDP by 2003.
G
In response to the economic crisis, Ireland sharply decreased
personal MARGINAL TAX RATES from a high of 65% to just over
40% and corporate MTRs from 50% to a low of 12.5% by 2004.
MTR
Ireland’s erratic monetary policy during the 1970s
gave way to stability resulting in much lower
INFLATION RATES.
Ireland joined the EU and increased their
INTERNATIONAL TRADE SECTOR
substantially during this time.
So NOW what would you
expect the
Growth Rate of Real GDP
in Ireland to be, with these
NEW institutions and policies
in place?
Annual Growth Rate of REAL GDP
Given what you know about
economic policy …. do you
think what happened to
Ireland was really a
miracle?
Ireland’s population is 1%
of total European population
25% of all U.S. European
investment is in Ireland
Foreign investment flowed into Ireland as a
result of more freedom and lower taxes.
END of CH. 17