CHAPTER
32
Ch 7 International Trade and development
Main points:
7.1 Patterns and Trends in International Trade
7.2 Opportunity cost, comparative advantage, and
absolute advantage
7.3- Winners and Losers from International Trade
7.4 International Trade Restrictions
7.5 Why is international trade restricted ?
7.6 Why the stress on free world trade?
7.7 International Institutions
After studying this chapter you will be able to
Describe the trends and patterns in international trade
Explain comparative advantage and explain why all
countries can gain from international trade
Explain why international trade restrictions reduce the
volume of imports and exports and reduce our
consumption possibilities
Explain the arguments that are used to justify
international trade restrictions and show how they are
flawed
Explain why we have international trade restrictions
7.1 Patterns and Trends in International Trade
• All countries participate in international trade through exports
and imports.
• Exports: goods and services produced in one country and sold to
other countries.
• Imports: goods and services consumed in a country but which have
been purchased from other countries.
• Trade deficit :A country has a trade deficit if its imports exceed its
exports .
• Trade surplus : a country has a trade surplus if its exports exceed
its imports.
4
7.2 Opportunity cost, comparitive
advantage, and absolute advantage
Opportunity cost
• Whatever must be given up to obtain some item
• Measures the trade-off between the two goods that
each producer faces
Absolute Advantage
Comparative Advantage
A country enjoys an absolute
advantage
over
another
country in the production of a
product when it uses fewer
resources to produce that
product than the other country
does.
A country enjoys a comparative
advantage in the production of
a good when that good can be
produced at a lower cost in
terms of other goods.
( opportunity cost )
• A person who has an absolute advantage does not
have a comparative advantage in every activity.
• For ex.John Grisham is a better lawyer and a better
author of fastpaced thrillers than most people. He has an
absolute advantage in these two activities. But compared
to others, he is a better writer than lawyer, so his
comparative advantage is in writing.
Comparative advantage and differences in opportunity
costs are the basis for specialized production and
trade.
Comparative advantage is the fundamental force that
generates trade between nations.
The basis for comparative trade is divergent opportunity
costs between countries.
Nations can increase the consumption of goods and
services when they allocate resources to the production of
those goods and services for which they have a
comparative advantage
7.3- Winners and Losers from
International Trade
Whenever potential trading parties have differences in
opportunity costs, they can each benefit from trade.
Benefits of Trade
Trade can benefit everyone in a society because it
allows people to specialize in activities in which they have
a comparative advantage.
Even if there are some parties who may lose from
international trade ,but the net effect of trading is usually
gaining
7.3- Winners and Losers from
International Trade
A - Gains and Losses from Imports
Consumers Gain from Imports :Compared to a situation
with no international trade, the price paid by
the consumer falls and the quantity consumed
increases. It is clear that the consumer gains
Domestic Producers Lose from Imports : Compared
to a situation with no international trade, the price
received by a domestic producer of an item that is
imported falls. Also, the quantity sold by the domestic
producer of a good or service that is also imported
decreases.
B - Gains and Losses from Exports
Domestic Consumers Lose from Exports:Compared to a
situation with no international trade, the price paid by the
consumer rises and the quantity consumed in the
domestic economy decreases. The domestic consumer
loses.
Domestic Producers Gain from Exports Compared
to a situation with no international trade, the price
received by a domestic producer of an item that is
exported rises. Also, the quantity sold by the domestic
producer of a good or service that is also exported
increases.
C – Net Gain:
• Export producers and import consumers
gain, export consumers and import producers lose,
but the gains are greater than the losses.
• So international trade provides a net gain for
a country.
Gains and losses from international trade
Consumers
Domestic producers
Imports
Gain
( P↓ & Qd ↑)
Lose
( P↓ & Qs ↓)
Exports
Lose
( P↑ & Qd ↓)
Gain
( P↑ & Qs ↑)
Gain from trade > losses from trade
Therefore :
NET GAIN
7.4 International Trade Restrictions
Governments restrict international trade to protect
domestic producers from competition by using two main
tools:
1. Tariffs
2. Nontariff barriers
A tariff is a tax that is imposed by the importing country
when an imported good crosses its international boundary.
A nontariff barrier is any action other than a tariff that
restricts international trade.
B- Non tariff barriers
Nontariff Barriers
The two main types of nontariff barriers are:
A quota is a quantitative restriction on the import of a
particular good, which specifies the maximum amount of
the good that may be imported in a given period of time.
A voluntary export restraint (VER) is an agreement
between two governments in which the government of the
exporting country agrees to restrain the volume of its own
exports.
Winners, Losers, and the Social Loss
from a Tariff
A tariff on an imported good creates winners and losers
and we’re now going to identify the winners and losers.
When the U.S. government imposes a tariff on
an imported good,
■ U.S. consumers of the good lose.
■ U.S. producers of the good gain.
■ U.S. consumers lose more than U.S. producers
gain: society loses.
Winners, Losers, and the Social Loss
from a Tariff
If U.S impose a tariff
U.S Consumers
U.S Producers
U.S Society
Lose
Gain
Lose
( P↑ & Qd ↓)
( P↑ & Qs ↑)
They can now increase
price like imported ones
Consumers lose more
because:
1- pay increase price to
domestic producers
2- Qd ↓
3- pay tariff to
government
Winners, Losers, and the Social Loss
from an Import Quota
An import quota creates winners and losers that are similar
to those of a tariff but with an interesting difference.
When the government imposes an import quota,
■ U.S. consumers of the good lose.
■ U.S. producers of the good gain.
■ Importers of the good gain.
■ Society loses.
Winners, Losers, and the Social Loss
from an Import Quota
If U.S impose an import quota
U.S Consumers
U.S Producers
U.S Importers
U.S Society
Lose
Gain
Gain
Lose
( P↑ & Qd ↓)
( P↑ & Qs ↑)
They can now
increase price like
imported ones
They buy at world
price and sell at
domestic price .
As long as world
price less than
domestic price ,so
they win.
Consumers lose
more than
producers and
importers gain.
7.5 Why is international trade restricted ?
Despite the fact that free trade promotes prosperity for all countries, trade is
restricted.
It is often argued that international trade should be restricted to
1.
Protects national security
2.
Protect infant industries
3.
Punish dumping
4. Saves jobs
5. Allows us to compete with cheap foreign labor
6. Brings diversity and stability to our economy
7. Penalizes nations with lax environmental standards
8. Protects national culture
9. Prevents rich nations from exploiting poor ones
7.6 Why the stress on free world trade?
 The world economy went into a deep depression in the
1930s, as many countries closed their barriers to trade with
other states. This led to:
Mass unemployment
Social upheaval
Rise of the Second World War
 Global powers set up bodies to support international trade
1. International Monetary Fund
2. World Bank
3. World trade organizations .
All countries encouraged to join these organisations, or face
exclusion from benefits of free world trade
7.7 International Institutions :
1- IMF international monetary fund
Role of IMF:
1. Lends countries with balance of payments problems
2. Pushes for economic reforms
3. Reports on policies in member states
2- World Bank
Role of World Bank:
1. Aims to help development by advising and lending – with many
conditions
2. Countries encouraged to lift import and export barriers, cut subsidies
and remove price controls
3- WTO
 Since General Agreement on Tariff and Trade's
(GATT) creation in 1947, there have been eight
rounds of trade negotiations between (1947 and
1993) aimed at lowering levels of protection around
the world.
 One of the outcomes of the eighth round which is
called Uruguay Round was the creation of the
World Trade Organization (WTO) in Jan 1995,
which replaced the GATT.
 General Agreement on Trade and Tariffs, GATT (1947)

Multi-lateral commitment to reducing trade barriers, sponsored
 Kennedy Round (1962 – 67)

Tariffs reduced average 35% on 2/3 of manufactured goods.
 Tokyo Round (1974 – 79)


Tariffs fall 1/3 on manufactures, restrict NTB’s,
Non-reciprocity principle for developing countries.
 Uruguay Round (1986 – 93)

Tariffs fall 34% on manufactures, agricultural subsidies cut 36%, textile quotas
(MFA) phased out, Nat'l treatment for services under GATS, establish WTO to
replace GATT.

Doha Round (2001-present)

As of 2008, talks have stalled over a divide on major issues, such as
agriculture, industrial tariffs and non-tariff barriers, services, and trade remedies.
3- WTO
Role of WTO:
1. The WTO deals with the rules of trade between countries
2. It developed from the General Agreement on Tariffs and
Trade (GATT)
3. WTO agreements set the ground rules for international
commerce.
Question on ch 7:
Suppose that in response to huge job losses in the U.S. textile
industry, Congress imposes a 100 percent tariff on imports of
textiles from China.
a. Explain how the tariff on textiles will change the price that
U.S. buyers pay for textiles, the quantity of textiles
imported, and the quantity of textiles produced in the
United States.
a. Explain how the U.S. and Chinese gains from trade will
change. Who in the United States will lose and who will
gain?
solution
A- The tariff raises the U.S. price of textiles. With the higher
price, the quantity of textiles consumed in the United States
decreases and the quantity produced increases. Imports of
textiles into the United States decrease.
B- The U.S. and Chinese gains from trade decrease. In the
United States, U.S. producers gain from the tariff. The U.S.
government also gains revenue from the tariff. U.S. textile
consumers lose