Economics 001
Principles of Microeconomics
"What do you think foreign trade means for
America? Do you see foreign trade more as
an opportunity for economic growth through
increased U.S. exports or a threat to the
economy from foreign imports?"
Professor Arik Levinson
•Lecture 24
– international trade
– tariffs
– protectionism
– absolute and comparative
advantage
a) Opportunity
b) Threat
c) Both
d) Neither
e) Unsure
Among economists ...
CNN/Opinion Research Corporation Poll. Oct. 12-14, 2007. N=1,212 adults
nationwide. MoE ± 3.
• "87.5% agree that the U.S. should eliminate remaining tariffs
and other barriers to trade"
• "90.1% disagree with the suggestion that the U.S. should
restrict employers from outsourcing work to foreign countries."
Whaples, The Economists' Voice 3 (9).
"What do you think foreign trade means for America? Do you see foreign
trade more as an opportunity for economic growth through increased U.S.
exports or a threat to the economy from foreign imports?"
.
Threat
Both (vol.)
Neither
(vol.)
%
%
%
%
%
46
45
5
2
2
Opportunity
10/12-14/07
Unsure
Absolute advantage
• DN: a country has absolute advantage in
production of X over a 2nd country, if it can
produce more X using the same resources.
• Gregory Mankiw : "Few propositions command as much
consensus among professional economists as that open world
trade increases economic growth and raises living standards."
Amount of Jeans or Sweaters
that can be produced from 1 unit of inputs
Jeans
Sweaters
US
10
6
England
5
10
• Absolute advantage is neither necessary nor
sufficient for gains from trade.
1
Now change 1 unit of US resources into Jeans
and 1 unit of England resources into Sweaters
Sweaters
160
WORLD PPF
Jeans
Sweaters
100
(100, 100)
Eng. PPF
US
+10
-6
England
-5
+10
60
US PPF
World gains:
+5
+4
50
100
150
Jeans
What if the US better at both Jeans and Sweaters ?
US
England
Jeans
Sweaters
100
60
5
10
Now change 1/10 unit of US resources into Jeans
and 1 unit of England resources into Sweaters
Jeans
US
Sweaters
+10
-6
England
-5
+10
World gains
+5
+4
Comparative advantage
• DN: a country has comparative advantage
in production of X over a 2nd country, if the
opportunity cost of producing X in the first
country is lower than in the 2nd country.
• Comparative advantage is necessary and
sufficient for gains from trade.
Translate Comparative Advantage
into Opportunity Costs
US
England
Jeans
Sweaters
100
60
5
10
Opportunity Costs
Jeans
Sweaters
US
0.6 sweaters
1.67 jeans
England
2 sweaters
0.5 jeans
2
TARIFFS
Free trade example:
US Jeans
P
England Jeans
P
D
S
D
S
US Sweaters
P
SUS
P
Q
Q
England Sweaters
P
D
DWL from producing
the wrong way
D
DWL from consuming
less than optimal
(MB > MC)
PW +t
t=tariff
Government
Gain producer
Lost Consumer Surplus
revenue
surplus
PW
S
DUS
Imports w/ tariff
S
Q
Q
SUS
DUS
Q
Imports w/ free trade
3