Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
37
C HAPTE R
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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INTERNATIONAL
TRADE
Copyright McGraw-Hill/Irwin, 2005
KEY FACTS ON TRADE
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Export Goods & Services
11% of American GDP
Exports Have Doubled as
a Percent of GDP since 1975
Key Terms
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$435 Billion Trade Deficit
in 2002 ($369 Billion in 2000)
Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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GLOBAL PERSPECTIVE
Shares of World Exports,
Selected Nations, 2001
0
2
4
6
8
10
12
United States
Germany
Japan
France
United Kingdom
China
Canada
Italy
Source: World Trade Organization
Copyright McGraw-Hill/Irwin, 2005
ECOMOMIC BASIS FOR TRADE
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Distribution of Economic
Resources
Different Technologies and/or
Resources
Goods are Differentiated as to
Quality and other Nonprice
Attributes
Labor-Intensive Goods
Land-Intensive Goods
Capital-Intensive Goods
Copyright McGraw-Hill/Irwin, 2005
COMPARATIVE ADVANTAGE
Two Isolated Nations
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Constant Costs
Straight Line PPF’s
Different Costs
Different Technology and
Resources in Each Nation
Cost Ratio
Self-Sufficiency Output Mix
Trading According to
Comparative Advantage
Graphically...
Copyright McGraw-Hill/Irwin, 2005
PRODUCTION POSSIBILITIES
Curve For Each Country
United States
Key Facts on Trade
Economic Basis For
Trade
45
Comparative Advantage
40
Production Possibilities
Trading Possibilities Lines
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
30
Coffee (tons)
Trade Barriers
35
Coffee (tons)
Equilibrium World Price
and Quantity of Exports
and Imports
25
20
15
10
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Brazil
30
25
20
15
10
A
5
5
B
0
0
5
10
15
20
Wheat (tons)
Copyright McGraw-Hill/Irwin, 2005
25
30
5
10
15
20
Wheat (tons)
PRODUCTION POSSIBILITIES
Principle of Comparative Advantage
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
Total output will be greatest when
each good is produced by the nation
that has the lowest domestic
opportunity cost for that good.
The Case for Protection
The World Trade
Organization
Key Terms
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U.S has comparative advantage in
wheat.
Brazil has comparative advantage
in coffee.
Copyright McGraw-Hill/Irwin, 2005
PRODUCTION POSSIBILITIES
Principle of Comparative Advantage
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Terms of Trade
Gains From Trade
Improved Options
Added Output
Trading Possibilities Line
Graphically…
Next
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Copyright McGraw-Hill/Irwin, 2005
TRADING POSSIBILITIES LINES
The Gains from Trade
United States
Key Facts on Trade
Economic Basis For
Trade
45
Comparative Advantage
40
Production Possibilities
Trading Possibilities Lines
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
Trading
possibilities line
30
Coffee (tons)
Trade Barriers
35
Coffee (tons)
Equilibrium World Price
and Quantity of Exports
and Imports
25
20
15
10
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Brazil
30
25
20
Trading
possibilities line
15
10
A
5
5
B
0
0
5
10
15
20
Wheat (tons)
Copyright McGraw-Hill/Irwin, 2005
25
30
5
10
15
20
Wheat (tons)
TRADING POSSIBILITIES LINES
The Gains from Trade
United States
Key Facts on Trade
45
Comparative Advantage
40
Production Possibilities
Trading Possibilities Lines
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
35
Coffee (tons)
Equilibrium World Price
and Quantity of Exports
and Imports
Trading
possibilities line
30
25
20
15
A’
10
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Coffee (tons)
Economic Basis For
Trade
Brazil
30
25
20
Trading
possibilities line
15
10
A
5
B’
5
B
0
0
5
10
15
20
Wheat (tons)
Copyright McGraw-Hill/Irwin, 2005
25
30
5
10
15
20
Wheat (tons)
TRADING POSSIBILITIES LINES
The Gains from Trade
United States
Key Facts on Trade
45
Comparative Advantage
40
Production Possibilities
Trading Possibilities Lines
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
35
Coffee (tons)
Equilibrium World Price
and Quantity of Exports
and Imports
Trading
possibilities line
The Case For
Free Trade
30
25
20
15
A’
10
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Coffee (tons)
Economic Basis For
Trade
Brazil
30
25
20
Trading
possibilities line
15
10
A
5
B’
5
B
0
0
5
10
15
20
Wheat (tons)
Copyright McGraw-Hill/Irwin, 2005
25
30
5
10
15
20
Wheat (tons)
SUPPLY AND DEMAND
IN THE UNITED STATES
U.S. Domestic
Aluminum Market
Key Facts on Trade
Economic Basis For
Trade
U.S. Export Supply
And Import Demand
Comparative Advantage
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Sd
$1.50
Price (per pound; U.S. dollars)
Trading Possibilities Lines
Price (per pound; U.S. dollars)
Production Possibilities
$1.50
1.25
1.00
.75
.50
Dd
.25
50
75 100 125 150
Quantity of Aluminum
Copyright McGraw-Hill/Irwin, 2005
1.25
1.00
If the world price
exceeds the U.S.
price by 25 cents...
.75
.50
.25
50
100
Quantity of Aluminum
SUPPLY AND DEMAND
IN THE UNITED STATES
U.S. Domestic
Aluminum Market
Key Facts on Trade
Economic Basis For
Trade
U.S. Export Supply
And Import Demand
Comparative Advantage
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Sd
$1.50
Price (per pound; U.S. dollars)
Trading Possibilities Lines
Price (per pound; U.S. dollars)
Production Possibilities
$1.50
SURPLUS = 50
1.25
1.00
.75
.50
Dd
.25
50
75 100 125 150
Quantity of Aluminum
Copyright McGraw-Hill/Irwin, 2005
1.25
EXPORTS = 50
1.00
.75
.50
If the world price
goes further up...
.25
50
100
Quantity of Aluminum
SUPPLY AND DEMAND
IN THE UNITED STATES
U.S. Domestic
Aluminum Market
Key Facts on Trade
Economic Basis For
Trade
U.S. Export Supply
And Import Demand
Comparative Advantage
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Sd
$1.50
SURPLUS = 100
1.25
SURPLUS = 50
$1.50
1.00
.75
.50
Dd
.25
50
75 100 125 150
Quantity of Aluminum
Copyright McGraw-Hill/Irwin, 2005
Price (per pound; U.S. dollars)
Trading Possibilities Lines
Price (per pound; U.S. dollars)
Production Possibilities
1.25
EXPORTS = 100
U.S.
export
supply
EXPORTS = 50
1.00
.75
.50
If world prices
fall below $1.00...
.25
50
100
Quantity of Aluminum
SUPPLY AND DEMAND
IN THE UNITED STATES
U.S. Domestic
Aluminum Market
Key Facts on Trade
Economic Basis For
Trade
U.S. Export Supply
And Import Demand
Comparative Advantage
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Sd
$1.50
SURPLUS = 100
1.25
SURPLUS = 50
$1.50
1.00
.75
SHORTAGE = 50
.50
Dd
.25
50
75 100 125 150
Quantity of Aluminum
Copyright McGraw-Hill/Irwin, 2005
Price (per pound; U.S. dollars)
Trading Possibilities Lines
Price (per pound; U.S. dollars)
Production Possibilities
1.25
EXPORTS = 100
U.S.
export
supply
EXPORTS = 50
1.00
.75
IMPORTS = 50
.50
.25
50
100
Quantity of Aluminum
SUPPLY AND DEMAND
IN THE UNITED STATES
U.S. Domestic
Aluminum Market
Key Facts on Trade
Economic Basis For
Trade
U.S. Export Supply
And Import Demand
Comparative Advantage
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Sd
$1.50
SURPLUS = 100
1.25
SURPLUS = 50
$1.50
1.00
.75
SHORTAGE = 50
.50
SHORTAGE = 100
Dd
.25
50
75 100 125 150
Quantity of Aluminum
Copyright McGraw-Hill/Irwin, 2005
Price (per pound; U.S. dollars)
Trading Possibilities Lines
Price (per pound; U.S. dollars)
Production Possibilities
1.25
EXPORTS = 100
U.S.
export
supply
EXPORTS = 50
1.00
U.S.
import
demand
.75
IMPORTS = 50
.50
IMPORTS = 100
.25
50
100
Quantity of Aluminum
SUPPLY AND DEMAND
IN THE CANADA
Canada’s Domestic
Aluminum Market
Key Facts on Trade
Economic Basis For
Trade
Canada’s Export Supply
And Import Demand
Comparative Advantage
Canadian
export
supply
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Sd
$1.50
SURPLUS = 100
1.25
SURPLUS = 50
1.00
.75
.50
SHORTAGE = 50
.25
50
Dd
75 100 125 150
Quantity of Aluminum
Copyright McGraw-Hill/Irwin, 2005
Price (per pound; U.S. dollars)
Trading Possibilities Lines
Price (per pound; U.S. dollars)
Production Possibilities
$1.50
1.25
1.00
Canadian
import
demand
.75
.50
.25
50
100
Quantity of Aluminum
EQUILIBRIUM WORLD PRICE AND
QUANTITY OF EXPORTS & IMPORTS
Key Facts on Trade
U.S. export
supply
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Price (per pound; U.S. dollars)
Economic Basis For
Trade
$1.50
Canadian
export
supply
1.25
1.00
.88
.75
Equilibrium
U.S. import
demand
.50
.25
Next
Slide
Canadian import
demand
25 50
100
Quantity of Aluminum
Copyright McGraw-Hill/Irwin, 2005
TRADE BARRIERS
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Tariffs
Revenue Tariff
Protective Tariff
Import Quota
Nontariff Barrier (NTB)
Voluntary Export
Restriction (VER)
Mercantilism
Copyright McGraw-Hill/Irwin, 2005
ECONOMIC IMPACT OF TARIFFS
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Direct Effects:
• Decline in Consumption
• Increased Domestic
Production
• Decline in Imports
• Tariff Revenue
Indirect Effect
Copyright McGraw-Hill/Irwin, 2005
ECONOMIC IMPACT OF TARIFFS
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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Economic Impact of
Quotas
Net Costs of Tariffs and
Quotas
Impact On Income
Distribution
Copyright McGraw-Hill/Irwin, 2005
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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THE CASE FOR PROTECTION
Military Self-Sufficiency
Increase Domestic Employment
•Job Creation From Imports
•Fallacy of Composition
•Possibility of Retaliation
•Smoot-Hawley Act of 1930
•Long-run feedbacks
Diversification-For-Stability
Infant-Industry Argument
Strategic Trade Policy
Protection-Against-Dumping
Cheap Foreign Labor
Copyright McGraw-Hill/Irwin, 2005
THE WORLD TRADE ORGANIZATION
World Trade Organization (WTO)
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
Key Terms
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•Reductions in Tariffs
Worldwide
•New Rules to Promote Trade
in Services
•Reduction in Agricultural
Subsidies
•Intellectual Property
Protections
•Phasing Out Textile Quotas
and Tariffs
Copyright McGraw-Hill/Irwin, 2005
labor-intensive goods
land-intensive goods
capital-intensive goods
cost ratio
principle of comparative
advantage
terms of trade
trading possibilities line
gains from trade
world price
domestic price
Copyright McGraw-Hill/Irwin, 2005
export supply curve
import demand curve
equilibrium world price
tariffs
revenue tariff
protective tariff
import quota
nontariff barrier (NTB)
voluntary export restriction
(VER)
strategic trade policy
dumping
World Trade Organization
(WTO)
BACK
END
Chapter 38
Key Facts on Trade
Economic Basis For
Trade
Comparative Advantage
Production Possibilities
Coming soon...
Trading Possibilities Lines
Equilibrium World Price
and Quantity of Exports
and Imports
Trade Barriers
Economic Impact of
Tariffs
The Case for Protection
The World Trade
Organization
EXCHANGE RATES,
THE BALANCE OF PAYMENTS,
AND TRADE DEFICITS
Key Terms
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Copyright McGraw-Hill/Irwin, 2005