Download Chapter 16.f03

International Trade
and Trade Policy
MB
MC
MB MC
Introduction

Understanding the Economic Issues of
International Trade
The benefits of trade
 The costs of trade
 The economic impact of trade restrictions

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 2
MB MC

Comparative Advantage
as a Basis for Trade
The principle of comparative advantage
tells us that we can all enjoy more
goods and services when each country
produces according to its comparative
advantage, and then trades with other
countries.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 3
MB MC

Closed Economy


Production and Consumption
Possibilities and the Benefits of Trade
An economy that does not trade with the
rest of the world
Open Economy

An economy that trades with other
countries
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 4
MB MC

Production and Consumption
Possibilities and the Benefits of Trade
Example
Two good economy (Brazil) -- computers
and coffee
 Two workers who work 50 weeks/year

 Carlos
o Can produce 100 pounds/week or 1 computer
 Maria
o Can produce 100 pounds/week or or 2 computers
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 5
MB MC

Production and Consumption
Possibilities and the Benefits of Trade
Example

Slope of PPC (Maria)
Maria' s OCcomputers 

- 100 lbs coffee/wk
  50# s of coffee/com puter
2 computers/ wk
Slope of PPC (Carlos)
Carlos' OC computers 
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
- 100 lbs coffee/wk
  100# s of coffee/com puter
1 computers/ wk
Chapter 16: International Trade and Trade Policy
Slide 6
MB MC
Production Possibilities
Curve for a Two-Worker Economy
Coffee (pounds/year)
10,000
A
SlopeAC = Maria’s OCcomputers =
- 50 pounds coffee/computer
C
5,000
SlopeCB = Carlos’ OCcomputers =
- 100 pounds coffee/computer
B
100
150
Computers (number/year)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 7
MB MC
Production Possibilities
Curve for a Three-Worker Economy
A
Maria produces computers
Coffee (pounds/year)
C
Maria and Pedro
produces computers
D
All three workers
produce computers
B
Computers (number/year)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 8
MB MC
Production Possibilities
Curve for a Many-Worker Economy
A
Observations
• The OC of producing an
additional unit = the slope of
the line that touches the point
• OC will increase as output of
on good increases
Coffee (pounds/year)
C
D
B
Computers (number/year)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 9
MB MC
Production and Consumption
Possibilities and the Benefits of Trade

A country’s PPC shows the quantities of
different goods that its economy can
produce.

Consumption Possibilities

The combinations of goods and services
that a country’s citizens might feasibly
consume
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 10
MB MC

Production and Consumption
Possibilities and the Benefits of Trade
In a closed economy:
Society’s production possibilities =
consumption possibilities.
 If a country is self-sufficient, it is called
autarky.

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 11
MB MC

Production and Consumption
Possibilities and the Benefits of Trade
In an open economy:

The society’s consumption possibilities are
typically greater than its production
possibilities.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 12
Coffee (pounds/year)
MB MC
Brazil’s Consumption
Possibilities with Trade
10,000
A
Without Trade
•Brazil’s consumption possibilities = ACB
•Assume production is at C
•The OC of 50 lbs coffee = 1 computer
•The OC of 1 computer = 100 lbs coffee
Production possibilities
Slope = -50 pounds coffee/computer
5,000
Production possibilities
Slope = -100 pounds coffee/computer
C
B
100
150
Computers (number/year)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 13
MB MC
Brazil’s Consumption
Possibilities with Trade
F
Coffee (pounds/year)
13,000
5,000
Consumption possibilities with trade
Slope = -80 pounds coffee/computer
C
With Trade
• World market: 80 lbs coffee for 1 computer
• Trade 100 computers for 8,000 lbs coffee +
5,000 lbs from Carlos = 13,000 lbs
• Trade 80 lbs coffee for 1 computer or 5,000
lbs of coffee for 62.5 computers + 100
computers from Maria = 162.5 computers
• Consumption Possibilities = FCG
G
100
162.5
Computers (number/year)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 14
MB MC
Brazil’s Consumption
Possibilities with Trade
F
Coffee (pounds/year)
13,000
10,000
5,000
Consumption possibilities with trade
Slope = -80 pounds coffee/computer
A
Production possibilities
Slope = -50 pounds coffee/computer
Production possibilities
Slope = -100 pounds coffee/computer
C
B
100
G
150 162.5
Computers (number/year)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 15
MB MC
Consumption Possibilities
Curve for a Many-Worker Economy
F
Consumption
possibilities
• Slope of FG = relative prices of coffee &
computers on the world market
• Maximum consumption by producing at C
(slope of PPC = FG) and trading for the
desired combination on FG
Coffee (pounds/year)
A
C
Production
possibilities
B
G
Computers (number/year)
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 16
MB MC

Production and Consumption
Possibilities and the Benefits of Trade
Economic Naturalist

Does “cheap” foreign labor pose a danger
to high-wage economies?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 17
MB MC

Production and Consumption
Possibilities and the Benefits of Trade
Economic Naturalist

Scenario
 U.S.
and Fredonia produce software and beef.
 Real wages in Fredonia are lower than in the
U.S.
 Fredonia is half as productive as the U.S. in
beef production.
 Fredonia is one-tenth as productive in software
production.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 18
MB MC

Production and Consumption
Possibilities and the Benefits of Trade
Economic Naturalist

Outcome
 Fredonia
has a comparative advantage in beef.
 U.S. has a comparative advantage in software.
 The U.S. will trade software for beef and
increase its consumption of both.
 Employment in the software industry in the U.S.
increases and employment in the beef industry
will decrease.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 19
MB MC
The Market for
Computers in Brazil
Price of computers
Closed economy
equilibrium
Domestic
supply
E
p
World
price
Imports
Domestic
demand
qS
q
qD
Quantity of computers
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 20
MB MC

A Supply and Demand
Perspective on Trade
If the price of a good or service in a
closed economy is greater than the
world price, and that economy opens
itself to trade, the economy will tend to
become a net importer of that good or
service.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 21
MB MC
The Market for Coffee in Brazil
Domestic
supply
Exports
Price of coffee
World
price
E
p
Closed economy
equilibrium
Domestic
demand
qD
q
qS
Quantity of coffee
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 22
MB MC

A Supply and Demand
Perspective on Trade
If the price of a good or service in a
closed economy is lower than the world
price, and that economy opens itself for
trade, the economy will tend to become
a net exporter of that good or service.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 23
MB MC

A Supply and Demand
Perspective on Trade
Observations of the Mutually Beneficial
Gains from Trade
Countries will profit by exporting the goods
and services for which they have a
comparative advantage.
 The revenue from the exports are used to
import goods and services for which they
do not have a comparative advantage.

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 24
MB MC

A Supply and Demand
Perspective on Trade
Observations of the Mutually Beneficial
Gains from Trade
The markets will ensure that goods will be
produced where opportunity cost is lowest.
 The consumption possibilities will be
maximized.

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 25
MB MC

A Supply and Demand
Perspective on Trade
Winners and Losers from Trade

Winners
 Consumers
of imported goods
 Producers of exported goods

Losers
 Consumers
of exported goods
 Producers of imported goods
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 26
MB MC

Protectionism


The view that free trade is injurious and
should be restricted
Tariff


A Supply and Demand
Perspective on Trade
A tax imposed on an imported good
Quota

A legal limit on the quantity of a good that
may be imported
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 27
MB MC
The Market for Computers after
the Imposition of an Import Tariff
Price of computers
Domestic
supply
Production w/o
tariff
E
World price
Domestic
demand
Imports
before
tariff
qS
qD
Quantity of computers
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 28
MB MC
The Market for Computers after
the Imposition of an Import Tariff
Price of computers
Domestic
supply
Production w/o
tariff
Tariff tax collection
E
World price plus tariff
pT
World price
Domestic
demand
Imports
after
tariff
qS
q’S
q’D
qD
Quantity of computers
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 29
MB MC

A Supply and Demand
Perspective on Trade
Tariffs

The market for computers in Brazil:
= QD = 3,000 - 0.5 PC
 Supply = QS = 1,000 + 0.5 PC
 Demand
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 30
MB MC

A Supply and Demand
Perspective on Trade
Tariffs

Closed economy
 Equilibrium
price:
o 1,000 + 0.5 PC = 3,000 - 0.5PC
o PC = $2,000
 Equilibrium
quantity:
o 1,000 + 0.5(2,000) = 2,000 computers
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 31
MB MC

A Supply and Demand
Perspective on Trade
Tariffs

Open economy
P
= world price = $1,500
 qS = 1,000 + 0.5(1,500) = 1,750
 qD = 3,000 - 0.5(1,500) = 2,250
 Imports = 2,250 - 1,750 = 500 computers/yr
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 32
MB MC

A Supply and Demand
Perspective on Trade
Tariffs

Tariff imposed
 Tariff
= $300/computer
 P = world price + tariff = $1,500 + $300 = $1,800
 qs = 1,000 + (0.5)(1,800) = 1,900 computers/yr
 qd = 3,000 = (0.5)(1,800) = 2,100
 Imports = 2,100 - 1,900 = 200
 Tariff revenue = $300/computer x 200
computers/yr = $60,000/yr
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 33
MB MC
The Market for Computers after
the Imposition of an Import Quota
Price of computers
Domestic
supply
World
price
Domestic
demand
Imports with
open economy
qS
qD
Quantity of computers
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 34
MB MC
The Market for Computers after
the Imposition of an Import Quota
Price of computers
•Impact of quota = impact of tariff
•Revenue from quota goes to the producer
Domestic
supply
Domestic
supply
plus quota
F
pT
World
price
Domestic
demand
Import
quota
qS
q’S
q’D
qD
Quantity of computers
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 35
MB MC

A Supply and Demand
Perspective on Trade
Quotas & Tariffs
Market effects of tariffs are the same.
 Tariffs generate tax revenue.
 Quotas generate revenue for the firms that
hold an import license.

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 36
MB MC

A Supply and Demand
Perspective on Trade
Effects of an import Quota

Without quota:
 qS

= 1,000 + 0.5PC
With a quota of 200 computers
 qS
= 1,000 + 0.5PC + 200 = 1,200 + 0.5PC
 qD = 3,000 - 0.5PC
 Equilibrium = 1,200 + 0.5PC = 3,000 - 0.5 PC
 Equilibrium price = $1,800
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 37
MB MC

A Supply and Demand
Perspective on Trade
Effects of an import Quota

With a quota of 200 computers
 Domestic
quantity supplied
o 1,000 + 0.5($1,800) = 1,900 computers/yr
 Domestic
quantity demanded
o 3,000 - 0.5 ($1,800) = 2,100 computers/yr
 Imports
= 2,100 - 1,900 = 200
 Revenue to the importers
o ($1,800 - $1,500) x 200 = $60,000
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 38
MB MC

A Supply and Demand
Perspective on Trade
Economic Naturalist

Who benefited from and who was hurt by
voluntary export restraints on Japanese
automobiles in the 1980s?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 39
MB MC

A Supply and Demand
Perspective on Trade
Other Barriers to Trade
Red-tape barriers
 Regulations

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 40
MB MC

A Supply and Demand
Perspective on Trade
The Inefficiency of Protectionism
Trade barriers are inefficient and reduce the
size of the economic pie.
 Because trade barriers benefit certain
groups, and these groups may be well
organized, they may be successful in
lobbying for trade barriers.
 The gains from trade could be used to assist
groups that have been hurt by trade.

Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 41
MB MC

A Supply and Demand
Perspective on Trade
Economic Naturalist

What should Lula do about foreign trade?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 16: International Trade and Trade Policy
Slide 42
End of
Chapter
MB
MC