Macro Chapter 18
Gaining from International Trade
6 Learning Goals
1) Realize the size and growth of trade for the
United States
2) Explain why specialization and trade generate
gains
3) Apply supply and demand analysis to
international trade
4) Describe the kinds of trade barriers and their
effects
5) Recognize reasons for implementing trade
restrictions
6) Clear up common misconceptions of
international trade
The Trade Sector of the
United States
The trade sector is a growing portion of GDP
Imports
Exports
Gains from Specialization and
Trade
Class Activity: Economics is Everywhere 20.2
My wife and I needed to move 40 pieces
of fencing, all with nails in them, from
behind the house out to the street, and the
nails had to be removed before the trash
collectors would take the fencing. How to
organize the task? There are three
activities: dragging the wood, pounding the
nails with a hammer so the heads stick up,
and pulling the nails out with pliers.
Q: How would you advise this couple to
organize? Why?
Comparative vs. Absolute
Advantage:
Comparative advantage reveals
opportunity costs
Absolute advantage does not; it simply
means “who can produce more”
Watch comparative advantage video:
Made in America- Jack Daniel whiskey
Q18.1 Opportunity costs differ among
nations primarily because
1. nations employ different currencies.
2. nations have different endowments of land,
labor skills, capital, and technology.
3. nations have different political institutions.
4. work-leisure preferences vary considerably
from one nation to another.
“Rules:”
(1) Make and trade away the good for
which you have a comparative advantage
(2) Trade for (receive) the good for which
you don’t have a comparative advantage
How do you know if you have a
comparative advantage?
You have a comparative advantage if you
have a lower opportunity cost than
someone else.
Class Activity: Calculate opportunity cost
from the following information. Who has
the comparative advantage in what good?
The following chart indicates the production
possibilities of food and clothing per worker day in
the U.S. and Japan
Food
Clothing
U.S.
4
12
Japan
3
6
Q18.2 (MA) Which of the following are true?
1.
2.
3.
4.
5.
6.
7.
8.
9.
Japan incurs a lower opportunity cost when producing food.
Japan incurs a lower opportunity cost when producing clothing.
The U.S. incurs a lower opportunity cost when producing food.
The U.S. incurs a lower opportunity cost when producing clothing.
Japan has a comparative advantage in clothing.
Japan has a comparative advantage in food.
The U.S. has a comparative advantage in clothing.
The U.S. has a comparative advantage in food.
The U.S. has an absolute advantage in food.
Supply, Demand, and
International Trade
Graph of surplus/exports:
Watch content video: surplus_exports
Graph of shortage/imports:
Watch content video: shortage_imports
Class Activity, continued:
Who is helped and hurt by exports?
Who is helped and hurt by imports?
What’s the net gain (or loss)?
Who is helped/harmed?
With exports:
–
–
–
–
US consumers pay a higher world price
Foreign consumers buy more products
US producers receive a higher world price
US producers sell more products
With imports:
–
–
–
–
US consumers pay a lower world price
Foreign producers sell more products
US producers receive a lower world price
US producers sell fewer products
With exports and imports:
– The benefits outweigh the costs; a net gain exists
The Economics of Trade
Restrictions
We don’t want to repeat SmootHawley!
See “Smoot-Hawley article.pdf” in the
supplemental material on Blackboard
Watch video: Commanding Heights 3International Trade Part 1
Q18.3 If domestic producers have a
comparative advantage in producing a good,
1.
2.
3.
4.
trade restrictions will be required before the producers can
benefit from their comparative advantage.
trade restrictions will still be required before the domestic
producers can compete with low-wage producers abroad.
they will be able to compete effectively in a competitive
world market.
the government should subsidize production of the good so
the domestic producers will be able to achieve a larger
share of the world market.
Potential consequences of limiting
international trade…
Watch video: Stossel Macro Clip 7boycotts of sweatshops
Main point: Generally, any trade restriction will
reduce quantity, increase consumer prices, and
create a deadweight loss (elimination of gains
from trade).
A tariff is a tax on imports (it raises the price so
quantity demanded will fall); it reduces imports
and generates revenue for the government
A quota is a limit on the physical units that can
be imported; it generates no revenue
Q18.4 Which of the following would be expected if
the tariff on foreign-produced automobiles were
increased?
1.
2.
3.
4.
The domestic price of automobiles would fall.
The supply of foreign automobiles to the domestic
market would decline, causing auto prices to rise.
The number of unemployed workers in the domestic
automobile industry would rise.
The demand for foreign-produced automobiles would
increase, causing the price of automobiles to increase
in other nations.
Q18.5 Trade restrictions that limit the sale
of low-price foreign goods in the U.S. market
1.
2.
3.
4.
increase the real income of Americans.
benefit domestic producers in the protected industries at the
expense of consumers and domestic producers in export
industries.
help channel more of our resources into producing goods
for which we are a low-cost producer.
reduce unemployment and increase the productivity of
American workers.
Why Do Nations Adopt Trade
Restrictions?
Major reasons:
1)
2)
3)
4)
National defense
Infant industry
Antidumping
Special interests
Trade Barriers and Popular
Trade Fallacies
Watch video: Commanding Heights 3International Trade Part 2
A country cannot simultaneously reduce
imports and increase exports for an
extended period of time
Imports
Exports
Huge point (that most people
don’t understand):
Our imports give purchasing power to
foreigners. They, in turn, purchase our
exports.
If we limited imports, we would limit the
income of foreigners and they wouldn’t be
able to buy as many of our exports.
That’s why imports and exports are
positively related
Watch video: Stossel Macro Clip 8outsourcing
A study done in 2004 by Professor Matthew J.
Slaughter at Dartmouth University found that
outsourcing is actually a way of increasing the
number of American jobs. He found that
employment increased both for American firms
involved in outsourcing but also for their affiliates
in other countries. While employment in foreign
affiliates rose by 2.8 million jobs, employment in
the U.S. parent firms rose even more --by 5.5
million jobs. In other words, for every one job
outsourced, U.S. firms created nearly two jobs in
the United States.
Here are more accurate statements
about free trade:
Free trade is harmful to some Americans
but is helpful to America
More people are helped by free trade than
are hurt by free trade (i.e. America
experiences a net gain)
Here’s the evidence:
Graph 1: Total employment has increased
while exports and imports have increased
Employment
Imports
Exports
Graph 2: The unemployment rate is inversely
related to exports and imports
Imports
Unemployment
Rate
Exports
Graph 3: An increase in the trade sector has
not caused inflation
Imports
Exports
Inflation Rate
Graph 4: Per Capita Income has increased while
both exports and imports have increased
Per Capita Income
Imports
Exports
Watch video: Stossel MECA- International
Trade- Criticisms and Responses
Q18.6 The argument that import restrictions save
jobs and promote prosperity fails to recognize that
1.
2.
3.
4.
there are no secondary effects of import restrictions.
import restrictions will lower prices in the protected industries.
import restrictions cannot create jobs in any industries.
U.S. imports provide people in other countries with the
purchasing power required for the purchase of U.S. exports.
Question Answers:
18.1 = 2
18.2 = 1, 4, 6, 7, 9
18.3 = 3
18.4 = 2
18.5 = 2
18.6 = 4