International Trade
Del Mar College
John Daly
©2002 South-Western Publishing, A Division of Thomson Learning
What Does the U.S. Export and
Import?
• Exports: automobiles,
computers, aircraft, corn,
wheat, soybeans, scientific
instruments, coal, and
plastics.
• Imports: petroleum,
automobiles, clothing, iron
and steel, office machines,
footwear, fish, coffee, and
diamonds.
Why Do People In Different Countries
Trade with One Another?
• International trade exists for the same
reasons that trade at any level exists:
individuals trade to make themselves better
off.
• Some countries will be able to produce
some goods that other countries cannot
produce or can produce only at extremely
high costs.
Comparative Advantage
• Comparative Advantage: The situation in
which a country can produce a good at a
lower opportunity cost than another country.
• Countries specialize in the production of the
good in which they have a comparative
advantage
Production Possibilities in Two
The United States
Countries
and Japan can
produce the two
goods in the
combinations
shown. Initially,
the United States is
at point B on its
PPF and Japan is at
point B on its PPF.
Both countries can
be made better off
by specializing in
and trading the
good in which each
has a comparative
advantage
Comparative Advantages
• After they have specialized in production, the two
countries must settle on the terms of trade.
• A country gains by specializing in producing and
trading the good in which it has a comparative
advantage
• It is individuals’ desire to earn a dollar, a franc, or
a pound that determines the pattern of
international trade. The desire to earn a profit
determines what a country specializes in and
trades.
Q&A
• Suppose the United States can produce 120 units
of X at an opportunity cost of 20 units of Y, and
Great Britain can produce 40 units of X at an
opportunity cost of 80 units of Y. Identify
favorable terms of trade for the two countries.
• If a country can produce more of all goods than
any other country, would it benefit from
specializing and trading? Explain your answer.
• Do government officials analyze data to determine
what their country can produce at a comparative
advantage?
Trade Restrictions
• Specialization and
international trade benefit
individuals in different
countries. But this benefit
occurs on the net. Every
person may not gain.
• Consumers’ Surplus =
Maximum Buying Price –
the Price Paid.
• Producers’ Surplus = Price
Received – Minimum
Selling Price
Consumers’
and Producers’
Surplus
(a) 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. (b) 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 the producers’ surplus.
Tariffs
• A Tariff is a tax on imports. The primary effect of
a tariff is to raise the price of imported goods to
the domestic consumer.
• Consumers receive more consumers’ surplus when
tariffs do not exist and less when they do.
• Producers receive less producers’ surplus when
tariffs do not exist and more when they do exist.
• The effects of the tariff area a decrease in
consumers’ surplus, an increase in producers’
surplus, and tariff revenues for government.
The
Effects of
a Tariff
A tariff raises the price of cars from PW to PW + T, decreases consumers’
surplus, increases producers’ surplus, and generates tariff revenues.
Because consumers lose more than producers and government gain,
there is a net loss due to the tariff.
Quotas
• A Quota is a legal limit on the amount of a good that may be
imported.
• A quota reduces the supply of a good and raises the price of
imported goods to domestic consumers.
• The effects of a quota are a decrease in consumers’ surplus,
an increase in producers’ surplus, and an increase in total
revenue to the importers who sell the allowed number of
imported units.
• Because the loss to consumers is greater than the increase in
producers’ surplus plus the gain to importers, there is a net
loss as a result of the quota.
The
Effects
of a
Quota
A quota that sets the legal limit of imports at Q4-Q3 causes the price of
cars to increase from PW to PQ. A quota raises price, decreases
consumers’ surplus, increases producers’ surplus, increases the total
revenue importers earn. Because consumers lose more than producers
and importers gain, there is a net loss due to the quota
The Politics of Quotas
• The benefits of quotas are concentrated on
relatively few producers, and the costs of quotas
are spread out over relatively many consumers.
• Each producer’s gain is relatively large to each
consumer’s loss.
• We predict the producers will lobby government to
obtain the relatively large gains from quotas but
that consumers will not lobby government to keep
from paying the small additional costs due to
quotas.
Why Nations Restrict Trade
• National Defense Argument: Certain industries
should remain based in our country, especially if
they manufacture items vital to our defense. Items
this has been argued for include: pens, pottery,
peanuts, papers, candles, thumbtacks, tuna fishing,
and pencils.
• Infant Industry Argument: New industries must
be protected from older, established foreign
competitors until they are mature enough to
compete. However, removing that protection is
almost impossible.
Why Nations Restrict Trade (cont.)
• Antidumping Argument: Dumping is the sale of goods
abroad at a price below their cost and below the price
charged in the domestic market. A foreign competitor could
wipe out a market by dumping their products in America.
• Foreign – Export – Subsidies Argument: Some
governments subsidize the firms that export goods. Firms
hold that this forces them to compete with both the firm and
the government in question. Usually, the ones complaining
are the domestic producers who can’t sell their goods at as
high a price because of the gift domestic consumers are
receiving from foreign governments.
Why Nations Restrict Trade
(cont.II)
• Low Foreign Wages Argument: American producers can’t
compete with foreign producers because American
producers pay high wages to their workers and foreign firms
pay low wages. A country’s low wage advantage may be
offset by its productivity disadvantage. High wages means
High productivity. Low wages mean low productivity.
• Saving Domestic Jobs Argument: This argument is
actually most of the previous arguments but in disguise.
Critics often argue that if a domestic producer is being outcompeted by foreign producers and domestic jobs in a
particular industry are being lost as a result, the world
market is signaling that those labor resources could be put
to better use in an industry in which the country holds a
comparative advantage.
Saving Jobs
Important Questions to ask
about “Saving Jobs”:
1. How many domestic jobs
in the firms that produce
good X are being saved
because of the tariff?
2. How much do consumers
have to pay in higher
prices to save those jobs?
World Trade Organization
• “[The WTO’s] overriding objective is to help trade
flow smoothly, freely, fairly, and predictably.”
• It does these things by administering trade
agreements, acting as a forum for trade
negotiation, settling trade disputes, reviewing
national trade policies, assisting developing
countries in trade policy issues, and cooperating
with other international organizations.
• The WTO, in theory, is supposed to lead to freer
international trade, and there is some evidence that
is has done just this.
• Critics often say that it has achieved this objective
at some cost to a nation’s sovereignty.
Q&A
• Who benefits and who loses from tariffs? Explain
your answer.
• Why don’t domestic consumers regularly lobby
against quotas and tariffs?
• What is a major difference between the effects of a
quota and the effects of a tariff.
• Although there is a net loss (to society) from
tariffs, tariffs exist in the real world. Why?