Survey: Given the current employment
problems in this country, should we
discourage foreign imports and impose tariffs
and quotas in order to stimulate domestic
production?
1.
2.
3.
4.
Yes
No
Not sure
No opinion/indifferent
Unit 10 - International Trade

Free Trade versus Protectionism
Free trade is an exchange of products and
resources without trade barriers, restrictions,
tariffs, or quotas.
Protectionism is a government policy to
discourage trade between countries or areas.
Microeconomics
Unit 10 - International Trade

The Law of Absolute Advantages
A country has an absolute advantage in
producing a product if it can make it more
efficiently (at lower cost) than another country.
Microeconomics
Unit 10 - International Trade

Absolute Advantage Example
The following numbers represent hours of
production needed to manufacture one barrel of
oil and one watch.
China
Venezuela
Oil
30
10
Watch
12
20
Microeconomics
Unit 10 - International Trade

Specialization
Venezuela produces 100 additional barrels of oil
(1,000 hours) and decreases watch production by 50
(1,000 hours).
China produces 100 additional watches (1,200 hours)
and decreases oil production by 40 (1,200 hours).
C
30
Watch 12
Oil
V
10
20
Microeconomics
Unit 10 - International Trade

Specialization
Total world production increases by:
Venezuelan oil:
Chinese oil:
Additional oil production:
+100
- 40
+ 60
Venezuelan watches:
Chinese watches:
Additional watches
- 50
+100
+ 50
Microeconomics
Unit 10 - International Trade

Specialization
Both countries use the same amount of
resources, but total world production increases.
After sharing (trading) the additional goods
produced, each country is able to increase its
standard of living.
Microeconomics
If a country produces both products more
efficiently, then this country should:
1.
2.
3.
4.
Not trade at all with the
other country
Produce both products
and sell both products to
the other country
Specialize in the product
it produces most
efficiently
None of the above
Unit 10 - International Trade

The Law of comparative advantages
A country has a comparative advantage in
producing a good when it produces a good
more efficiently relative to the production ratios
of the same goods produced by another
country.
Microeconomics
Unit 10 - International Trade

Comparative Advantage Example
The following numbers represent hours of
production needed to manufacture one barrel of
oil and one watch.
China
Venezuela
Oil
30
10
Watch
40
20
Microeconomics
Unit 10 - International Trade

Specialization
Venezuela is more efficient (has the absolute
advantages) in producing both oil and watches.
Which country has the comparative advantage in
producing oil?
Which country has the comparative advantage in
producing watches?
Microeconomics
Unit 10 - International Trade
 Comparative
Advantage Example
Venezuela produces 100 additional barrels of oil (1,000 hours)
and decreases its watch production by 50 (1,000 hours).
China produces 60 additional watches (2,400 hours) and
decreases its oil production by 80 (2,400 hours).
China
Venezuela
Oil
30
10
Watch
40
20
Microeconomics
Unit 10 - International Trade

Specialization
Total world production increases by:
Venezuelan oil:
Chinese oil:
Additional oil production:
+100
- 80
+ 20
Venezuelan watches:
Chinese watches:
Additional watches
- 50
+60
+10
Microeconomics
Unit 10 - International Trade

Specialization
Even in the case where one country is better at making all
goods, it pays for countries to specialize and trade.
Both countries use the same amount of resources, but total
world production increases. After sharing (trading) the
additional goods produced, each country is able to increase
its standard of living.
Microeconomics
Unit 10 - International Trade

Arguments against Free Trade
1.
2.
3.
4.
5.
Common arguments against free trade are:
National security.
Infant industry.
Counteracting dumping or foreign subsidies.
Protecting domestic jobs.
Improving the trade deficit.
Microeconomics
Unit 10 - International Trade

National Security Argument
We should not import defense-related products
(weapons, micro chips) because if we become
enemies with the exporting country, we are
vulnerable.
Microeconomics
Unit 10 - International Trade

Critique of the National Security Argument
Trading defense related products with stable countries
serves as a deterrent against conflict.
We can import the product from a variety of countries.
We can produce many defense related products here as
well; it would not be difficult to increase production in
case of conflict.
Microeconomics
Unit 10 - International Trade

Infant Industry Argument
New industries are not as
cost-effective as established
industries.
We should protect domestic
industries if they are new.
Microeconomics
Unit 10 - International Trade

Critique of the Infant Industry Argument
Countries often protect their “infant” industries
longer than necessary.
Once tariffs and quotas are in place, they are
politically and economically difficult to
eliminate.
Competition, not protectionism, is what
strengthens industries.
Microeconomics
Unit 10 - International Trade

Counteracting Dumping and Foreign
Subsidies
If foreign countries subsidize their manufacturers
(farming, steel, etc.), they have an advantage.
Some foreign manufacturers “dump” (sell at below
cost) their products to establish a future monopoly
situation in the market.
Tariffs and quotas will offset this unfair advantage.
Microeconomics
Unit 10 - International Trade

Critique of the Counteracting Dumping and
Foreign Subsidies Argument
If foreign countries subsidize their
manufacturers, or if companies dump their
products, it results in lower prices for our
consumers. This gives us more money to purchase
products, including domestic ones.
Monopolies typically don’t charge high prices. A
monopoly will be challenged if the price is high. If
they do charge high prices, they don’t last.
Microeconomics
Unit 10 - International Trade

Protecting Domestic Jobs
Making foreign goods more
expensive through import restrictions,
makes domestic products relatively more
attractive.
Higher demand for our products will lead to more
employment.
Microeconomics
Unit 10 - International Trade

Critique of the Protecting Domestic Jobs
Argument
If we impose import restrictions to protect domestic
industries, other countries will do the same (retaliation),
and our exports will decrease.
Eventually, everyone will lose the advantages of free trade.
Protectionism results in less competition, less efficiency,
less production, higher prices, lower quality products, and
less variety of products for consumers.
Microeconomics
Unit 10 - International Trade

Improving the Trade Deficit
If we reduce our imports, then our trade deficit
will improve.
Microeconomics
Unit 10 - International Trade
Critique of the Improving the Trade
Deficit Argument

Restricting imports results in decreases in exports
(see previous argument), so the overall deficit will
not improve.
Overall productivity and wealth will decline
because of decreasing specialization and
competition.
Microeconomics
Unit 10 - International Trade
Critique of the Improving the Trade
Deficit Argument (cont’d)

A trade deficit does not mean that a country is in
debt. It means that the merchandise part of the
balance of payments is negative; the other
components are on balance, by definition,
positive.
Trade deficits are not necessarily bad; they can be
a sign of a country’s strength.
Microeconomics
Unit 10 - International Trade

Less-developed Countries (LDCs)
Development Aid given to LDCs in 2010:
$128.7 billion ($30.2 billion by U.S.)
Africans living on less than $1.25 per day in
2009: 50% (was 58% in 1996)
Real GDP per capita in sub-Saharan Africa
(LDCs) in 2009 was less than $700.

Source: Organization for Economic Cooperation and Development, World Bank
Unit 10 - International Trade

Less-developed Countries (LDCs)
Characteristics of LDCs include:
Lack of free market policies.
Improper domestic economic policies.
Government corruption.
Poor provision of public
services.
Microeconomics
Unit 10 - International Trade

Less-developed Countries (LDCs)
LDCs need structural changes in
their governments and economies.
No amount of financial help from
industrialized countries will significantly help
their situation if structural changes do not
take place.
Microeconomics