U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Chapter 7. Comparative Advantage and the
Gains from International Trade
Instructor: JINKOOK LEE
Department of Economics / Texas A&M University
ECON 203 502
Principles of Macroeconomics
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
International Trade
International trade has grown tremendously over the past 50 years. This is
the result of...
the falling costs of shipping products
the spread of reliable communications and transportation
changes in government policies
Tariff: A tax imposed by a government on imports
Imports: Goods and services bought domestically but produced in other
countries.
Exports: Goods and services produced domestically but sold in other
countries.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
The Importance of Trade to the U.S. Economy
International Trade Is of Increasing Importance to the U.S.
Both exports and imports have been steadily increasing as a fraction of U.S. GDP.
Each year, the U.S. exports about 50% of its wheat and rice crops and 20% of its
corn crop.
About 20% of U.S. manufacturing jobs depend directly (or indirectly) on exports.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
U.S. International Trade in a World Context
The Eight Leading Exporting Countries, 2010
The United States is the leading exporting country, accounting for 9.7 percent of
total world exports.
The values are the shares of total world exports of merchandise and commercial
services.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
U.S. International Trade in a World Context
International Trade as a Percentage of GDP
International trade is still less important to the United States than to most other
countries.
Belgium and Netherlands imports and exports make up more than half of GDP.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
A Brief Review of Absolute and Comparative Advantage
Absolute advantage: The ability of an individual, a firm, or a country to
produce more of a good or service than competitors, using the same amount
of resources.
Comparative advantage: The ability of an individual, a firm, or a country
to produce a good or service at a lower opportunity cost than competitors.
Opportunity cost: The highest-valued alternative that must be given up to
engage in an activity.
The basis for trade is comparative advantage, not absolute advantage.
Individuals, firms, and countries are better off if they specialize in
producing goods for which they have a comparative advantage and
obtain the other goods by trading.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Comparative Advantage in International Trade
Q. Which country should export Cell Phones?
(An Example of Japanese Workers Being More Productive Than American Workers)
(The Opportunity Costs of Producing Cell Phones and Tablet Computers)
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Increasing Consumption through Trade
(Gains from Trade for Japan and the United States)
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Why Don’t We See Complete Specialization?
We do not see complete specialization in the real world for three main
reasons:
1
Not all goods and services are traded internationally.
Some services are difficult to export, such as medical care.
2
Production of most goods involves increasing opportunity costs.
If a country devotes more workers to producing a good, the opportunity
cost of producing more of that good will increase, causing the country
to stop short of complete specialization.
3
Tastes for products differ.
Most products are differentiated. As a result, countries may each have
a comparative advantage in producing different varieties of a particular
product.
Additionally, losers from trade are to convince their government to bar
imports of the competing products.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Where Does Comparative Advantage Come From?
Among the main sources of comparative advantage are the following:
1
Climate and natural resources.
2
Relative abundance of labor and capital.
Some countries have a comparative advantage in producing goods
requiring highly skilled workers.
Others have a comparative advantage requiring unskilled workers and
relatively simple machinery.
3
Technology.
Some countries are strong in product technologies, which involve the
ability to develop new products.
Other countries are strong in process technologies, which involve the
ability to improve the processes used to make existing products.
4
External economies.
Once an industry becomes established in an area, firms that locate in
that area gain advantages over firms located elsewhere.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Free Trade Makes Consumers Better Off
Free trade: Trade between countries that is without government
restrictions.
(The U.S. Market for Ethanol under Autarky)
The equilibrium price of ethanol is $2.00 per gallon, and the
equilibrium quantity is 6.0 billion gallons per year.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Free Trade Makes Consumers Better Off
Now, suppose that the U.S. begins importing ethanol from other
countries that produce ethanol for $1.00 per gallon.
Once imports of ethanol are permitted, U.S. firms will not be able to sell
ethanol at prices higher than the world price of $1.00.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Free Trade Makes Consumers Better Off
(The Effect of Imports on the U.S. Ethanol Market)
Equilibrium moves F → G.
the price of ethanol falls from
$2 to $1.
U.S. consumers increase their
purchases from 6.0 billion to 9.0
billion gallons.
U.S. producers reduce the quantity of ethanol they supply from 6.0
billion to 3.0 billion gallons.
Imports equal 6.0 billion gallons, which is the difference between U.S.
consumption and U.S. production.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Free Trade Makes Consumers Better Off
International trade helps consumers but hurts firms that are less efficient
than foreign competitors.
Thus, these firms and their workers are often strong supporters of
government policies that restrict trade.
These policies usually take one of following forms: tariffs, quotas, or
voluntary export restraints.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Tariffs
Tariffs: taxes imposed by a government on goods imported into a country.
The $0.50-per-gallon tariff raises the price of ethanol in the United States to $1.50
per gallon.
Equilibrium moves from point G to point H.
U.S. producers increase the quantity they supply to 4.5 billion gallons.
U.S. consumers reduce their purchases to 7.5 billion gallons.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
Quotas and Voluntary Export Restraints
Quota: A numerical limit a government imposes on the quantity of a good
that can be imported into the country.
Voluntary export restraint (VER) An agreement negotiated between two
countries that places a numerical limit on the quantity of a good that can
be imported by one country from the other country.
In the 1980s, the U.S. and Japan negotiated a VER that limited the
quantity of automobiles the U.S. would import from Japan.
Quotas and VERs have similar economic effects.
U.S. in the International Economy
Comparative Advantage in Trade
Gain from Trade
Government Policies Restricting Trade
The Economic Effect of the U.S. Sugar Quota
In 2010, the sugar quota limits imports to 5.3 billion pounds.
U.S. producers supply 15.9 billion pounds.
U.S. consumers purchase 21.2 billion pounds rather than the 27.5 billion pounds.
With the quota, equilibrium moves from point E to point F