Download international trade

INTERNATIONAL TRADE
Trade Insights
Trade=exchanging one thing for another. Usually
goods or services for $$.
The economics profession nearly unanimously
backs free trade.
Question: Are trade deficits a signal that the U.S.
cannot compete in the global marketplace?
Is Outsourcing Good?
Answer – No and Yes respectively. Low wages
are not a reliable measure of global
competitiveness.
Competition regardless of where it takes place,
has to produce MORE OUTPUT for a given
quantity of INPUTS.
*****A worker’s contribution to the production
process is measured by MPP. A worker’s
MPP depends on the quantity and quality of
other resources in the production process
plus the worker’s educational skills and skilllevel.
The Economy Tomorrow
• Global competitiveness usually depends on
the costs of production.
– Lower-cost production allows a firm to compete
more effectively in global markets.
• Cheap foreign labor?
– A lower wage does not mean lower labor costs.
– Lower wages usually are paid to those with lower
productivity (output per hour), and vice versa.
– Unit labor cost (wage divided by output per hour)
is the true measure of labor cost.
21-4
Checking unit labor cost
Unit Labor cost = wage rate
MPP
America:
Unit Labor Cost =
$12.00 per hour
6 units per hour
= $2/unit of output
Mexico:
Unit Labor Cost =
$3.00 per hour
1 unit/hr
= $3/unit of output
The U.S. still produces more/hour than other
economies
Incentive is ?
Real World Labor Cost/wage rate
• Low wage rate does not always indicate lower
unit output cost.
• *Service jobs are an exception if education is
comparable.…China has lower wage rate…so
should HP produce printers there? Hilton
Honors…Apple sent Iphones out for production!!
Profit for Apple Iphone (over 50%)
• Mexican labor in the previous example would be
more costly to use even though the wage rate is
lower.
What is most expensive part of
production?
http://www.chinaoutsourcing.com/
So why wouldn’t businesses seek cheaper
labor market if they can?
The Economy Tomorrow
• Productivity advances and lower costs of
production will allow:
– produce more goods and services with available
resources. (expand resources)
– Improve competitiveness in global markets.
– Shift the production function up and push cost
curves down.
• U.S. productivity must continue to advance at
a brisk pace if we want to stay competitive in
the economy tomorrow.
21-8
Why do businesses operate?
They don’t go into
business to
engage in
competition!
Profit!
Japan – supply chain halt
result earthquake
Think of the many
products in the U.S.
that are dependent
on parts and
products from
Japan.
Best Countries For Outsourcing
India | Philippines | Russia | China | Canada
| Mexico |Ireland
Bottom Line Productive
Statement
• Productivity in any economy means
staying competitive in the global
markets and “making more things” than
others.
So………….
If economists agree that Free Trade is a
good thing….. Why all the fuss politically
and internally about
1) jobs fleeing the country\
2) unfair advantages for subsidies/
3) what is insourcing?
Why does International Trade
Exist?
Because countries that trade are both better
off.
“No nation was every ruined by trade.”
Benjamin Franklin
Terms of Trade = how much of one thing for how
much of something else.
Transaction costs = costs of time/effort to
negotiate or work out deals.
Absolute Advantage = Comparison of production
costs of two countries.
Comparative Advantage = Output is greatest when
each product is made by the country with the
lowest opportunity cost.
What is Exchange? = giving up one thing for
another.
Dick and Jane can both build boats
Both can build boats/cars
Dick can build more cars in less
time than Jane
Jane can build more boats than
Dick
Dick builds cars- Jane builds
boats… They trade freely
and both are better off.
Process = which has lowest
opportunity cost… each
gains more than initial
individual effort.
Comparative Advantage
Two countries can both produce two goods. Each
one can produce one of goods cheaper than the
other. They produce at their lower opportunity
cost – and trade freely.
“The ability of a country to produce a
specific good at a lower opportunity
cost than its trading partners.”
David Ricardo, English Economists in 1800s
developed this theory.
What to Trade?
Countries specialize in the production of
the good in which they have a
comparative advantage.
The situation when a country can produce
a good at lower opportunity cost than
another country can.
For a tutorial on
specialization and trade
click the flags
Terms of trade are crucial
EX ANTE…………….
“BEFORE”
POST ANTE……….
“AFTER”
Ex Ante
Elizabeth and Brian Before the Trade
Elizabeth decides to produce 20 loaves bread Brian decides to
produce 30 apples
Terms of trade = Elizabeth trades 8 loaves for Brian’s 12 apples
Ex Post
Remember terms of trade 8 loaves for 12 apples….
Elizabeth now consumes 12 loaves bread and 12 apples
Brian consumes 8 loves of bread and 18 apples
Clearly both are better off… See first column above!
Trade works…. But free trade works great.
International Trade
 Major U.S. exports include automobiles,
computers, aircraft, corn, wheat, soybeans,
scientific instruments, coal, and plastic materials.
 Major imports include petroleum, automobiles,
clothing, iron and steel, office machines,
footwear, fish, coffee, and diamonds.
Distributional Effects and Trade
Restrictions
 The benefits of international trade are not
equally distributed to all individuals in the
population.
 Benefit occurs on net (gains minus losses).
 Every individual person may not gain, in fact
some may lose.
 Unfavorable distributional effects may lead to
trade restrictions such as:
 Tariff - A tax on imports.
 Quota - A legal limit on the amount of a good that may
be imported.
Consumers’ Surplus
As the shaded area
indicates, the difference
between the maximum or
highest amount
consumers would be
willing to pay and the
price they actually pay is
consumers’ surplus.
Producers’ Surplus
As the shaded area
indicates, the difference
between the price sellers
receive for the good and
the minimum or lowest
price they would be
willing to sell the good
for is producers’ surplus.
Why Restrict Trade?
 National–Defense Argument – certain industries are
necessary to the national defense.
 Infant-Industry Argument – new industries often need
protection from older, established foreign firms.
 Antidumping Argument – foreign competitors will sell
goods at below cost of production so as to penetrate
markets
 Low-Foreign-Wage Argument- Domestic producers pay
high wages to their workers and foreign producers pay
low wages to their workers
 Saving-Domestic-Jobs Argument – Foreign producers
displace domestic workers.
GEOPOLITICAL ECONOMIC
WORLD
Why does the U.S. have to
worry about the global economy?
Why can’t we just produce for
ourselves and forget the rest of
the world?
What really is trade?
• If I write a book and use my income to buy a
car made in Detroit, no one will question this
transaction. I’m better off and the car
manufacturer is better off.
• Two areas: (1) modern economy is built on
trade, (2) we pay people to do things we don’t
want to do.. Like buying coffee at Starbucks,
getting our oil changed, painting our house,
Why Trade???
Think about your life without trade:
1. You wake up early in small,drafty house
that you built yourself.
2. Put on your clothes that you wove yourself
from shearing the sheep in your yard.
3. Pluck a few coffee beans off a tree that
does not grow well in Wisconsin all the
while hoping that your hen laid at least one
egg overnight.
OUR STANDARD OF LIVING IS HIGH
BECAUSE WE ARE ABLE TO FOCUS ON
WHAT WE DO BEST AND TRADE FOR
THE REST!
The U.S., when established, set up one
very large trade zone… freely trading
with other states.
When countries trade among
themselves, the result can be
beneficial.… word “freely” is the culprit.
Bottom Line for Trade
1. Productivity is what makes us rich.
2. Specialization is what makes us
productive.
3. Trade allows us to specialize
Trade Creates Losers
Any discussion of globalization
immediately brings up “loss of jobs.”
Dallas has experienced some heavy
blows in this arena.
It’s hard to explain to the Levi workers in
south Texas or elsewhere why they
have no employment, but that Indonesia
has all the work it can handle from Levi.
Trade, like technology, CAN DESTROY
jobs, particularly low-skilled jobs.
What is the objective for every firm?
PROFIT MAXIMIZING.
The key question again rolls back to
productivity. If the worker in
Bangladesh is “relatively” productive for
a less costly labor rate, then the firm will
do a CBA (cost benefit analysis).
If the firm is receiving negative Customer
Service replies (Dell, outsourcing of
tech support), they may decided to pull
labor for that service back into the U.S.
Comparative Costs
Specialization yields more efficiency in
production.
Specialization and trade are mutually
beneficial or “profitable” to the two
nations IF the comparative costs of
producing the two products within the
nations differ
4 Ways government commonly
interferes with trade
1. Protective tariffs. (are excise taxes or
duties placed on imported goods)…
Purpose. To “protect” shield domestic
producers from foreign competition
What about “protecting” our U.S. jobs?
PROTECTIONISM SAVES JOBS IN THE
SHORT RUN…. AND SLOWS ECONOMIC
GROWTH IN THE LONG RUN….
(RETALIATION CAN BE EXPECTED)
See Smoot-Hawley Tariff
Lowering trade barriers has the same impact on
consumers as cutting taxes
(Wright Amendment is protectionism-which I
am happy to report was repealed by
Congress 9/30/06)
2. Import Quotas….
A limit on the amount of any specified
good that can enter the country over a
fixed period.
(example: Only X # of bottles of Cognac
can be imported)
3. Nontariff barriers
(Just a way around allowing imports into
the country by establishing standards
that could not be complied with and
yards of red tape to hassle with)…
Countries will just forget trading with
that country and go someplace else to
trade.
4. Export Subsidies
Government pays (subsidies- gives dollars to)
domestic producers of export goods.
This reduces their production costs, lowers their
taxes and allows producers to charge lower
prices and sell more exports.
Legislation (Oct 2004) ceased most of this
arrangement with Am companies… WTO
sanctioned American trade for unfair
subsidies, and Congress finally had to
comply.
A word about rate of currency
exchange
 The U.S. Dollar most widely accepted for of
currency in the world
 Fluctuation of dollar replicates the fluctuation
of the supply and demand for the currency.
 Dollar in relation to Yen, Euro, etc is
calculated for international trade
 As importer – if dollar is down – have to pay
more for goods coming into U.S. to sell
 As exporter – if dollar down – country
receiving goods pays less for American
goods.
More words for exchange
 If you are selling jeans to Germany, there
are two ways to consummate the sale.
 1) Spot transaction – have to quote a price
in either dollars and euros. A price is
agreed to – but exchange rate might
change before deal is completed. Either
party may profit or lose since it is a floating
rate.
Words continued
 2.) Second way to complete the exchange of
jeans to Germany. Just wait until ready to
ship and purchase the Euros needed to pay
the company receiving the goods.
 Buyer and seller have to agree which
currency they want to pay and receive.
 Exchange banks open 24 hours – 5 days a
week.
 Many people speculate and invest in
currency to gain financial profit for the trade.
Currency Converter
“No nation was ever ruined by
trade.”
Benjamin Franklin
* Sometime in your life, read the
“Petition of the Candlemakers 1845 …”
by Bastiat