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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