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Chapter 33 International trade David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward ©The McGraw-Hill Companies, 2008 Import and Export /GDP in Turkey (%) 60.0 50.0 40.0 30.0 20.0 10.0 0.0 İhracat/GSYİH (%) İthalat/GSYİH (%) Toplam Ticaret/GSYİH (%) ©The McGraw-Hill Companies, 2008 The Exports and Imports in the World. Exports (%) Imports (%) 12 14 10 12 8 10 8 6 6 4 4 2 0 2 0 ©The McGraw-Hill Companies, 2008 The components of the World’s exports (20002010) 20.0 15.0 10.0 5.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -5.0 -10.0 -15.0 -20.0 Agricultural products Fuels and mining products Manufactures ©The McGraw-Hill Companies, 2008 World Exports by Commodity Groups, 2010 2500 2000 1500 1000 500 0 5 ©The McGraw-Hill Companies, 2008 Exports and Imports in Turkey (2000-2011) 100 80 60 40 20 0 -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -40 -60 -80 Dış Ticaret Dengesi (Milyar $) İhracatın İthalatı Karşılama Oranı (%) ©The McGraw-Hill Companies, 2008 Turkey’s Exports by Region 80.0 70.0 60.0 50.0 40.0 30.0 20.0 2000 10.0 2011 0.0 ©The McGraw-Hill Companies, 2008 The Turkey’s Exports and Imports by Country in 2010 (Percentage of Total Trade) İthalat (%) İhracat (%) 14.0 12.0 12.0 10.0 11.6 10.1 10.0 9.5 8.0 9.3 8.0 6.0 6.4 5.7 6.6 6.0 5.5 5.3 5.3 4.0 4.0 2.0 2.0 0.0 0.0 Rusya Almanya Çin ABD İtalya 8 Almanya İngiltere©The İtalya Fransa Irak 2008 McGraw-Hill Companies, Exports to the GDP (%) 90 80 70 60 50 40 30 20 10 0 Belçika İtalya Japonya İngiltere Amerika 1967 1980 1991 2005 Fransa Hollanda Türkiye 2010 9 ©The McGraw-Hill Companies, 2008 Some important issues • Raw materials prices – Less-developed countries (LDCs) have claimed exploitation by industrial countries • e.g. by buying raw materials cheaply & selling manufactures dear • Manufactured exports from LDCs – some LDCs have had success in exporting manufactures – leading to complaints that jobs are under threat in the industrial countries • Trade disputes between industrial countries – In some countries, established producers of certain goods are being undercut by efficient modern producers – especially from Japan & East Asia – should such exports be restricted? ©The McGraw-Hill Companies, 2008 Comparative advantage • Trade offers benefits when there are international differences in the opportunity cost of goods. • Opportunity cost of a good – the quantity of other goods sacrificed to make one more unit of that good • The law of comparative advantage – states that countries should specialise in producing and exporting the goods that they produce at a lower relative cost than other countries. ©The McGraw-Hill Companies, 2008 The source of comparative advantage • An important difference between countries is in factor endowments • which will be reflected in different relative factor prices – e.g. if the UK has relatively abundant capital but relatively scarce labour as compared with India, – then the UK would tend to specialise in capitalintensive goods, – and India would tend to specialise in labour-intensive products • Comparative advantage may also reflect a relative advantage in technology ©The McGraw-Hill Companies, 2008 Gainers and losers • Countries may gain from specialisation and trade – but not all countries may gain equally • Commercial policy – is government policy that influences international trade through taxes or subsidies • e.g. tariffs – or through direct restrictions on imports and exports. ©The McGraw-Hill Companies, 2008 The economic effects of a tariff DD and SS show the domestic demand and supply for a good. SS If the world price is Pw, and there is free trade, domestic firms supply Qs domestic demand is Qd Pw + T Pw DD Qs Qs ' Qd' Qd Quantity and the difference is imported. A tariff can stimulate domestic supply and restrict imports. At a domestic price Pw + T, where T is the size of the tariff. Domestic demand falls to Qd', domestic supply rises to Qs' and imports fall. ©The McGraw-Hill Companies, 2008 The welfare costs of a tariff The tariff leads both to transfers and net social losses. SS The government raises revenue – i.e. there is a transfer to the government Pw + T Pw DD Qs Qs ' and there is a transfer in the form of extra profits to producers. Qd' Qd Quantity There is a social cost from production inefficiency, given that the good could be imported at Pw, and a loss of consumer surplus. ©The McGraw-Hill Companies, 2008 Tariffs • The deadweight burden of a tariff suggests that society suffers from this method of restricting trade. • This is the case for free trade. • Tariffs have fallen substantially under the GATT – General Agreement on Tariffs and Trade ©The McGraw-Hill Companies, 2008 The case for tariffs – good arguments • Optimal tariff – a first-best argument – only valid where the importing country is large enough to affect the world price. • This policy fulfils the principle of targeting – which says that the most efficient way to attain a given objective is to use a policy that influences that activity directly. – Policies that attain the objective, but also influence other activities are second-best, because they distort those other activities. ©The McGraw-Hill Companies, 2008 The case for tariffs – secondbest arguments • Way of life – an attempt to preserve ‘traditional’ ways – a production subsidy would be better • Suppressing luxuries – an attempt to curb consumption patterns of the rich in a poor society – better achieved by a consumption tax • Infant industries – an attempt to nurture new activities via learning by doing – a temporary production subsidy probably better • Revenue – tariffs raise government revenue – but there are better ways • Cheap foreign labour – a non-argument – denies benefits of comparative advantage ©The McGraw-Hill Companies, 2008 Other commercial policies • Although tariff rates have fallen under GATT, there has been a proliferation of other trade restrictions – quotas – non-tariff barriers • administrative regulations that discriminate against foreign goods – export subsidies ©The McGraw-Hill Companies, 2008