1 / 31

Chapter 20

Chapter 20. International Trade. Some Key Trade Facts. U.S. trade deficit in goods $529 billion in 2015 U.S. trade surplus in services $220 billion in 2015 Canada largest U.S. trade partner Trade deficit with China $366 billion in 2015 Exports are 13% U.S. output Dependence on oil.

libitha
Download Presentation

Chapter 20

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 20 International Trade

  2. Some Key Trade Facts • U.S. trade deficit in goods • $529 billion in 2015 • U.S. trade surplus in services • $220 billion in 2015 • Canada largest U.S. trade partner • Trade deficit with China • $366 billion in 2015 • Exports are 13% U.S. output • Dependence on oil LO1

  3. Some Key Trade Facts Continued • Principal U.S. exports include: • Chemicals • Agricultural products • Consumer durables • Semiconductors • Aircraft • U.S. provides about 8.5% of world’s exports LO1

  4. Some Key Trade Facts Concluded • Principal U.S. imports include: • Petroleum • Automobiles • Metals • Household appliances • Computers LO1

  5. Shares of World Exports LO1

  6. Some Key Trade Facts Shares of World Exports Continued LO1

  7. Economic Basis for Trade • Nations have different resource endowments • Labor-intensive goods • Land-intensive goods • Capital-intensive goods LO2

  8. Comparative Advantage • Assumptions • Two nations • Same size labor force • Constant costs in each country • Different costs between countries • U.S. absolute advantage in both • Opportunity cost ratio • Slope of the curve • Vegetables sacrificed per ton of beef LO2

  9. 45 45 40 40 35 35 30 30 25 25 Vegetables (Tons) Vegetables (Tons) 20 20 15 15 12 10 10 A 5 5 4 Z 0 0 5 10 15 20 5 10 15 20 25 30 18 8 Beef (Tons) Beef (Tons) LO2 Production Possibilities (b) Mexico (a) United States

  10. Comparative Advantage Continued • Self-sufficiency output mix • Specialization and trade • Produce the good with the lowest domestic opportunity cost • Opportunity cost of 1 ton of beef: • 1 pound of vegetables in U.S. • 2 pounds of vegetables in Mexico LO2

  11. Comparative Advantage International Specialization LO2

  12. Terms of Trade • U.S. 1V = 1B • U.S. will sell 1B for more than 1V • Mexico 2V = 1B • Mexico will pay less than 2V for 1B • Settle between the two • Depends on supply/demand factors • Assume 1B = 1.5V LO2

  13. Gains from Trade • Trading possibilities line • Slope equals terms of trade • Improved options • Complete specialization • More of both goods • More efficient resource allocation LO2

  14. 45 45 40 40 V’ 35 35 30 30 Trading Possibilities Line 25 25 V Vegetables (Tons) Vegetables (Tons) Trading Possibilities Line 20 20 v 15 15 A’ 10 10 12 A 5 5 Z’ 4 0 Z 0 W B b b’ 5 10 15 20 25 30 5 10 15 20 Beef (Tons) Beef (Tons) 8 18 Gains from Trade Continued (a) United States (b) Mexico LO2

  15. Comparative Advantage Concluded • Trade with increasing costs • Concave production curve • Resources not perfectly substitutable • Incomplete specialization • Case for free trade • Promote efficiency • Promote competition LO2

  16. Supply and Demand Analysis • World price • Domestic price with no trade • World price > domestic price • Export surplus • Export supply curve • World price < domestic price • Import shortage • Import supply curve LO3

  17. 1.50 1.50 1.25 1.25 Price (Per Pound; U.S. Dollars Price (Per Pound; U.S. Dollars 1.00 1.00 .75 .75 .50 .50 0 0 50 100 Quantity of Aluminum (Millions of Pounds) Quantity of Aluminum (Millions of Pounds) 50 75 100 125 150 Supply and Demand Analysis Continued • U.S. Domestic Aluminum Market (b) U.S. Export Supply and Import Demand Surplus = 100 Sd c Surplus = 50 U.S. Export Supply b a U.S. Import Demand x Shortage = 50 y Dd Shortage = 100 LO3

  18. 1.50 1.50 1.25 1.25 Price (Per Pound; U.S. Dollars Price (Per Pound; U.S. Dollars 1.00 1.00 .75 .75 .50 .50 0 0 50 100 Quantity of Aluminum (Millions of Pounds) Quantity of Aluminum (Millions of Pounds) 50 75 100 125 150 Supply and Demand Analysis Concluded • Canada’s Domestic Aluminum Market (b) Canada’s Export Supply and Import Demand Surplus = 100 Sd s Surplus = 50 Canadian Export Supply r q Canadian Import Demand t Shortage = 50 Dd LO3

  19. Price (Per Pound; U.S. Dollars 1.00 .88 .75 0 50 100 Quantity of Aluminum (Millions of Pounds) International Equilibrium Import demand = Export supply U.S. Export Supply Canadian Export Supply e Equilibrium U.S. Import Demand Canadian Import Demand LO3

  20. Trade Barriers and Export Subsidies • Tariffs • Revenue tariff • Protective tariff • Import quota • Nontariff barrier (NTB) • Voluntary export restriction (VER) • Export subsidy LO4

  21. Economic Impact of Tariffs • Direct effects • Decline in consumption • Increase in domestic production • Decline in imports • Tariff revenue • Indirect effects LO4

  22. Economic Impact of Quotas • Decline in consumption • Increase in domestic production • Decline in imports • Quotas do not provide for any government revenue but instead transfer it to foreign producers LO4

  23. Price 0 Quantity Economic Effects of a Tariff or Quota Sd Sd + Q Pd Pt Pw Dd a b q c d LO4

  24. The Case for Protection • Military self-sufficiency • Diversification for stability • Infant industry • Protection against dumping • Increased domestic employment • Cheap foreign labor LO5

  25. Multilateral Trade Agreements • General Agreement on Tariffs and Trade (GATT) • World Trade Organization (WTO) • European Union (EU) • North American Free Trade Agreement (NAFTA) LO6

  26. GATT • Three principles: • Equal, nondiscriminatory trade between member nations • Reduction in tariffs • Elimination of import quotas LO6

  27. WTO • Established by Uruguay Round of GATT • 161 member nations in 2015 • Oversees trade agreements and rules on disputes • Critics argue that it may allow nations to circumvent environmental and worker-protection laws LO6

  28. European Union • Initiated in 1958 as Common Market • Abolished tariffs and import quotas between member nations • Established common tariff with nations outside the EU • Created Euro Zone with one currency LO6

  29. NAFTA • Agreement between U.S., Canada, and Mexico • Established a free trade zone between the countries • Trade has increased in all countries • Enhanced standard of living LO6

  30. Helping Those Hurt by Free Trade • Trade Adjustment Assistance Act • Designed to help individuals hurt by international trade • Offshoring of jobs • Shifting of work previously done by American workers to workers abroad LO6

  31. Petition of the Candlemakers • Petition of candlemakers asking for protection from natural light producers such as the sun • Tongue-in-cheek argument supporting the idea of free trade

More Related