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Chapter 37
International
Trade
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
• Comparative advantage and the
gains from trade
• Exports and imports
• Economic effects of tariffs and
quotas
• Arguments for protectionism
37-2
Some Key Facts
• U.S. trade deficit in goods
–$815 billion in 2007
• U.S. trade surplus in services
–$107 billion in 2007
• Canada largest U.S. trade partner
• Trade deficit with China
–$257 billion in 2007
• Exports are 12% U.S. output
• Dependence on oil
37-3
World Exports
Percentage Share of World Exports,
Selected Nations, 2007
0
Germany
United States
China
Japan
France
Netherlands
United Kingdom
Italy
2
4
6
8
10
12
9.20
8.59
8.02
5.38
4.06
3.83
3.71
3.40
Source: World Trade Organization
37-4
Economic Basis for Trade
• Nations have different resource
endowments
• Labor-intensive goods
• Land-intensive goods
• Capital-intensive goods
37-5
Comparative Advantage
• Assumptions
–Two nations
–Same size labor force
–Constant costs in each country
–Different costs across countries
–U.S. absolute advantage in both
• Opportunity cost ratio
–Slope of the curve
–Coffee sacrificed per ton of wheat
37-6
Comparative Advantage
45
45
(a) United States
40
35
35
30
30
Coffee (Tons)
Coffee (Tons)
40
25
20
25
20
15
15
12
10
A
10
5
4
5
0
(b) Brazil
5
10
15 18 20
Wheat (Tons)
25
30
0
B
5
8 10
15
Wheat (Tons)
20
37-7
Comparative Advantage
• Self-sufficiency output mix
• Specialization and trade
• Produce good with lowest
domestic opportunity cost
• Opportunity cost 1 ton wheat
–1 pound of coffee in U.S.
–2 pounds of coffee in Brazil
37-8
Comparative Advantage
• Terms of trade
–U.S. 1W = 1C
–U.S. will sell 1W for more than 1C
–Brazil 1W = 2C
–Brazil will pay less than 2C for 1W
–Settle between the two
–Depends on supply/demand factors
–Assume 1W = 1.5C
37-9
Comparative Advantage
• Gains from trade
–Trade possibilities line
–Slope equals terms of trade
–Improved options
• Complete specialization
• More of both goods
• More efficient resource allocation
37-10
Economic Basis for Trade
45
45
C’
(a) United States
(b) Brazil
40
40
35
C
25
20
A’
15
12
10
Trading
Possibilities Line
25
20
c
15
A
10
B’
5
4
5
0
30
Coffee (Tons)
Coffee (Tons)
30
35
Trading
Possibilities Line
W
5
10
15 18 20
Wheat (Tons)
25
30
0
B
5
w w’
8 10
15
20
Wheat (Tons)
37-11
Comparative Advantage
• Trade with increasing costs
–Concave production curve
–Resources not perfectly
substitutable
–Incomplete specialization
• The case for free trade
–Promote efficiency
–Promote competition
37-12
Supply and Demand Analysis
• World price
• Domestic price with no trade
• World price > domestic price
–Export surplus
–Export supply curve
• World price < domestic price
–Import shortage
–Import supply curve
37-13
Supply and Demand Analysis
(a) U.S. Domestic
Aluminum Market
Sd
Price (Per Pound; U.S. Dollars
Price (Per Pound; U.S. Dollars
Surplus = 100
(b) U.S. Export Supply
and Import Demand
1.50
1.50
Surplus = 50
c
1.25
1.25
1.00
1.00
.75
Shortage = 50
.50
0
75
100
125
Quantity of Aluminum
(Millions of Pounds)
a
U.S.
Import
Demand
.75
x
.50
y
Dd
Shortage = 100
50
b
U.S.
Export
Supply
150
0
50
100
Quantity of Aluminum
(Millions of Pounds)
37-14
Supply and Demand Analysis
(b) Canada’s Export Supply
and Import Demand
Price (Per Pound; U.S. Dollars
Price (Per Pound; U.S. Dollars
(a) Canada’s Domestic
Aluminum Market
1.50
1.50
Surplus = 100
Sd
1.25
1.25
Surplus = 50
s
1.00
1.00
.75
.50
Shortage = 50
0
50
75
100
Dd
125
Quantity of Aluminum
(Millions of Pounds)
150
.75
r
Canadian
Export
Supply
q
Canadian
Import
Demand
.50
t
0
50
100
Quantity of Aluminum
(Millions of Pounds)
37-15
International Equilibrium
Price (Per Pound; U.S. Dollars
Import demand = Export supply
U.S.
Export
Supply
1.00
.88
Canadian
Export
Supply
e
Equilibrium
U.S.
Import
Demand
.75
Canadian
Import Demand
0
50
100
Quantity of Aluminum
(Millions of Pounds)
37-16
Trade Barriers
• Tariffs
–Revenue tariff
–Protective tariff
• Import quota
• Nontariff barrier (NTB)
• Voluntary export restriction
(VER)
37-17
Trade Barriers
• Economic impact of tariffs
• Direct effects
–Decline in domestic consumption
–Increase in domestic production
–Decline in imports
–Tariff revenue
• Indirect effects
37-18
Trade Barriers
Economic Effects of a Tariff or Quota
Sd
Price
Sd + Q
Pd
Pt
Pw
Dd
0
a
b
q
c d
Quantity
37-19
The Case for Protection
•
•
•
•
•
•
•
Different arguments
Military self-sufficiency
Diversification for stability
Infant industry
Protection against dumping
Increased domestic employment
Cheap foreign labor
37-20
The WTO Protests
• World Trade Organization has
151 member nations
–Liberalize trade through negotiation
• Protest groups
–Labor unions, environmentalists,
socialists, anarchists
• Key issues for the protestors
–Labor protection and environmental
standards
37-21
Key Terms
•
•
•
•
•
•
•
•
•
•
•
•
•
labor-intensive goods
land-intensive goods
capital-intensive goods
opportunity-cost ratio
principle of comparative
advantage
terms of trade
trading possibilities line
gains from trade
world price
domestic price
export supply curve
import demand curve
equilibrium world price
•
•
•
•
•
•
•
•
•
•
•
tariffs
revenue tariff
protective tariff
import quota
nontariff barrier (NTB)
voluntary export restriction
(VER)
strategic trade policy
dumping
Smoot-Hawley Tariff Act
World Trade Organization
(WTO)
Doha Round
37-22
Next Chapter Preview…
The Balance of
Payments, Exchange
Rates, and Trade
Deficits
37-23