International Trade

1. International Trade

2. U.S. 2002 Trade Information exports: 1.0 trillion dollars 9.7 % of GDP imports: 1.4 trillion dollars 13.7 % of GDP Source: http://devdata.worldbank.org/external/CPProfile.asp?SelectedCountry=USA&CCODE=USA&CNAME=United+States&PTYPE=CP

3. When a country does not trade:production possibilities = consumption possibilities.This is not true when the country trades.

4. Example: Production Possibilities for the U.S. & JapanFood and Computers

5. Production Possibilities for the U.S. foodcomputers 0 30 20 20 40 10 60 0 10 C cost 20 F or 1C costs 2 F

6. Production Possibilities for the U.S. foodcomputers 0 30 20 20 40 10 60 0 10 C cost 20 F or 1C costs 2 F computers food

7. Production Possibilities for the U.S. foodcomputers 0 30 20 20 40 10 60 0 10 C cost 20 F or 1C costs 2 F computers 60 45 30 15 0 15 30 45 60 food

8. Production Possibilities for the U.S. foodcomputers 0 30 20 20 40 10 60 0 10 C cost 20 F or 1C costs 2 F computers 60 45 30 15 0 15 30 45 60 food

9. Production Possibilities for Japan foodcomputers 0 45 10 30 20 15 30 0 15 C cost 10 F or 1 C costs 2/3 F

10. Production Possibilities for Japan foodcomputers 0 45 10 30 20 15 30 0 15 C cost 10 F or 1 C costs 2/3 F computers food

11. Production Possibilities for Japan foodcomputers 0 45 10 30 20 15 30 0 15 C cost 10 F or 1 C costs 2/3 F computers 60 45 30 15 0 15 30 45 60 food

12. Production Possibilities for Japan foodcomputers 0 45 10 30 20 15 30 0 15 C cost 10 F or 1 C costs 2/3 F computers 60 45 30 15 0 15 30 45 60 food

13. Trade Arrangement Since 1 C costs 2 F in the U.S., and 1 C costs 2/3 F in Japan, 1 C will trade for between 2/3 F and 2 F. Suppose they agree to trade 1C for 1 F.

14. Consumption Possibilities for the U.S. computers The consumption possibilities are now greater than the production possibilities. 60 45 30 15 consumption production 0 15 30 45 60 food

15. Consumption Possibilities for Japan Again, theconsumption possibilities are greater than the production possibilities. computers 60 45 30 15 consumption production 0 15 30 45 60 food

16. Natural Barriers to Trade • contracting costs • negotiating costs • transportation costs

17. Artificial Barriers to Trade • tariff: a tax on imported goods • quota: a limit on the quantity of a good that is imported

18. Free Trade exchange of goods between countries without artificial barriers.

19. Benefits of Free Trade

20. Consumer Surplus difference between the price paid and the amount the consumer is willing to pay. P the area under the demand curve and above the price P* D Q

21. Producer Surplus difference between the amount the producer must receive to be willing to provide the good and the price paid. P S the area under the price and above the supply curve P* Q

22. Domestic Demand Curve (DD ): Demand for Cars by U.S. Consumers price A DD quantity

23. Domestic Supply Curve (SD ): Supply of Cars to U.S. Consumers by U.S. Producers price SD A D DD quantity

24. Without trade: price is OB and quantity is OI. price A B D O SD E DD I quantity

25. Without trade: consumer surplus is area ABE ... price SD A B D O E DD I quantity

26. ... and producer surplus is area DBE. price SD A B D O E DD I quantity

27. Total Supply Curve (ST ): Supply of Cars to U.S. Consumers by All Producers price A B D O SD E ST DD I quantity

28. With trade: price is OC and quantity purchased by U.S. consumers is OJ. price A B C D O SD E ST G DD I J quantity

29. The quantity sold by U.S. producers is OH and the quantity of imports is HJ. price A B C D O SD E ST F G DD H I J quantity

30. With trade: Consumer Surplus is area ACG price A B C D O SD E ST F G DD H I J quantity

31. Recall: Without trade, consumer surplus was area ABE. Consumers have gained area CBEG from trade. price A B C D O SD E ST F G DD H I J quantity

32. Suppose we are viewing this issue from the perspective of the U.S. government. Our concern is the welfare of U.S. consumers and U.S. producers (not foreign producers). Domestic producer surplus is the area above the domestic supply curve and below the price.

33. With trade: (Domestic) Producer Surplus is area CDF price A B C D O SD E ST F G DD H I J quantity

34. Recall: Without trade, producer surplus was area DBE. Producers have lost area CBEF from trade. price A B C D O SD E ST F G DD H I J quantity

35. So consumers have gained area CBEG and ... price A B C D O SD E ST F G DD H I J quantity

36. ... producers have lost area CBEF. price A B C D O SD E ST F G DD H I J quantity

37. So for U.S. citizens, there is a net gain from trade of area EFG. price A B C D O SD E ST F G DD H I J quantity

38. Putting it all together:Relative to the no-trade situation, when there is free trade, • the price paid by U.S. consumers is lower. • the quantity purchased by U.S. consumers is higher. • there is a gain in consumer surplus. • there is a loss of producer surplus. • there is a net gain to U.S. citizens.

39. How do tariffs & quotas affect U.S. citizens? Relative to the free trade situation, • the price paid by U.S. consumers is higher. • the quantity purchased by U.S. consumers is lower. • there is a loss of consumer surplus. • there is a gain in producer surplus.