Chapter 17
International Trade
Random Stuff You Need to Know
 Microeconomics-the study of the economic
behavior and decision making of small units,
such as individuals, families, and
businesses (small unit of analysis)
 Macroeconomics-the study of the behavior
and decision making of entire economies
(large unit of analysis)
Are we really global?
 The global economy is often in the news.
We often hear stories about the United
States and its relationships with its trade
partners: Canada, Mexico, Japan, China
and the nations of the European Union. Yet
for much of our history, foreign trade (the
value of exports plus imports) has been a
relatively small part of our economy.
Are we really global?
 In 2000, foreign trade accounted for about 25% of
GDP (gross domestic product)
– GDP: the total value of all final goods and services
produced in a country for a particular period, valued at
prices in that period
 Only about 8% of our labor force is engaged in
producing goods and services for export
 Since international trade is a relatively small part
of the economy, why is all the fuss about going
global?
The Mystery of the Global
Economy…
 Has everything to do with the principles of
economic reasoning…(which you must know for
your final exam).
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People choose.
People’s choices involve costs.
People respond to incentives in predictable ways.
People create economic systems that influence
individual choices and incentives.
– People gain when they trade voluntarily.
– People’s choices have consequences that lie in the
future.
True or False?
 The global economy is a growing part of the US
economy.
 Some American workers benefit from international
trade.
 American consumers benefit from international
trade.
 Prices in the United States are lower because of
international trade.
 Trade barriers have been increasing around the
world.
All American Kids?
 Why don’t we buy only American clothes?
 Read “activity one” and answer questions.
More Concepts to Know…
 NAFTA (North American Free Trade
Association)
– Trade agreement between Mexico, the United
States, and Canada
– Purposes:
 Reduce trade barriers between the countries in North
America
 Increase economic activity in North America
 Improve the standard of living in member countries
More Concepts to Know…
 World Trade Organization (WTO)
– 153 members as of 2008
– Purposes:
 Promote trade among countries around the world by
reducing trade barriers.
 Establish common rules for trade.
 Increase international trade.
 Improve the world’s standard of living.
Why People Trade: Comparative
Advantage
To understand why people trade, we should
review a couple of concepts from chapter 2.
What are factors of production?
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Land (natural resources)
– resources of nature that can be used in the
production of goods and services
Labor
– The human factor in production that includes
natural ability and human capital
– Economists measure a country’s human capital
by examining literacy rates
Capital
– resources produced for use in the production of
goods and services
Factors of Production and Trade
 The distribution of factors of production help
determine what goods and services an
economy produces.
 Distribution of factors are determined by
nature, a nation’s culture, and history.
 The production possibilities curve is a
graphical illustration of the alternative
combinations of goods and services an
economy can produce
Production Possibilities Model and
Trade
 The production possibilities model and curve
show us efficient, inefficient and impossible
levels of production.
 In order to know what goods and services to
produce and whether trade will benefit a
particular economy, it is essential to
understand the following terms: opportunity
cost, absolute advantage, comparative
advantage, specialization.
International Trade Concepts
 Opportunity Cost: The highest-valued
alternative that must be sacrificed (forgone)
as a result of choosing among alternatives.
 Calculated by: what is given up/what is
obtained
International Trade Concepts
 Absolute advantage-the ability to produce more of a given
product using a given amount of resources; when an
economy or individual can produce more of any good per
unit of labor than another country or individual that country
or person is said to have an absolute advantage
 Comparative advantage-the ability to produce a product
most efficiently given all the other products that could be
produced; occurs if the opportunity cost of producing that
good or service is lower for that economy than for any
other; this is the basis for international trade theory
International Trade Concepts
 Specialization: a method of assigning different
tasks to different workers; law of comparative
advantage economies should specialize in what
they have the lowest opportunity cost in producing
 According to Tregarthen & Rittenberg
“specialization implies an economy is producing
the goods and services in which it has a
comparative advantage” (2000, p. D-9)
Why People Trade: Comparative
Advantage
 After reading activity 1, Lesson 41…
– Why do people trade?
– Why would the United States import bananas?
– What is comparative advantage?
Activity 2 Review
 What was the main criterion for your choice
of shoes?
 Why is price important in your decisions?
 What types of foreign produced products did
the merchants you interviewed have for
sale?
 What did the people interviewed indicate
were the main criteria for purchasing foreign
goods?
Activity 3: The Home-Building
Mystery
 Was Ms. Brickstrom correct? Could both
builders benefit by specializing their
production? Why?
 Did anyone think that the two builders
should not trade? If so, why?
One v. Two-Way Trade
 One-way (interindustry trade) occurs when
countries specialize in producing the goods in
which they have a comparative advantage and
then exports those goods so they can import the
goods in which they do not have a comparative
advantage
– Ex: importing bananas exporting cars
 Two-way (intraindustry trade) occurs when
countries both import and export the same or
similar goods
– Ex: importing and exporting cars, fruit etc.
Why Two-Way Trade
 Variations in transportation costs
– May make more sense for a manufacturer in Maine to import raw
materials from Eastern Canada than to get them from California
 Seasonal effects
– Blueberries: we can’t grow them in the winter so we import them
from Chile, but then in the summer we export them
 Product differentiation
– Idea that the same type of product can vary tremendously
– Even though cars all have 4 wheels, a steering wheel and brakes,
the quality and features of automobiles varies from producer to
producer
Restrictions on International Trade
(be able to define and explain the following)
 Although free trade is economically the most
efficient, all countries enact trade barriers—usually
to protect domestic producers and workers from
foreign competition
 Protectionist policy- is one in which a country
restricts the importation of goods and services
produced in foreign countries
 Effects of protectionism
– Decrease supply, increase equilibrium price, reduce
equilibrium quantity
 Tariffs and quotas are the most common methods
of pursuing protectionism
Restrictions on International Trade
(be able to define and explain the following)
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Tariffs
Quotas
Voluntary Export Restrictions
Other:
– Safety standards
– Labeling requirements
– Pollution controls
– Quality restrictions
Justifications for Trade Restrictions
(be able to identify these arguments for restricting trade and explain how
economists would respond to each argument)
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Infant Industries
Strategic Trade Policy
National Security
Job Protection
Cheap Foreign Labor
Retaliation Against Dumping
Differences in Environmental Standards