chapter 16 policy toward trade n.
Download
Skip this Video
Download Presentation
Chapter 16 “Policy Toward Trade”

Loading in 2 Seconds...

play fullscreen
1 / 40

Chapter 16 “Policy Toward Trade” - PowerPoint PPT Presentation


  • 90 Views
  • Uploaded on

MACROECONOMICS: EXPLORE & APPLY by Ayers and Collinge. Chapter 16 “Policy Toward Trade”. Learning Objectives. Use the concept of a world price to explain imports, exports, and the gains from trade. Discuss the GATT and other trade arrangements among countries.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 16 “Policy Toward Trade”' - indira-lancaster


Download Now 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.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
learning objectives
Learning Objectives
  • Use the concept of a world price to explain imports, exports, and the gains from trade.
  • Discuss the GATT and other trade arrangements among countries.
  • Distinguish among the various barriers to trade that countries might impose.
  • Assess the arguments for and against protectionist policies.
  • Examine whether an oil import fee can promote energy security.
16 1 assessing the gains from trade
16.1ASSESSING THE GAINS FROM TRADE
  • International trade occurs in response to differences between the domestic price of goods and the world price of goods.
  • When a country opens it doors to international trade, the price in the domestic market will come to equal that of the world price.
  • If this adjustment means that the domestic price rises to meet the world price, the country will exports the good.
  • If the world price causes the domestic price to drop, then the country import the good.
gains from imports
Gains From Imports
  • Free trade implies that a country’s producers must accept world market prices, which would entail a higher price for some goods and a lower price for others.
  • Imports allow domestic consumers to pay a lower price for goods.
    • They also gain by consuming more of the good.
  • The gains to consumers from imports more than offsets the losses to producers, which reveals that the country as a whole is better off allowing imports.
imports effects on price and quantity

Imports result from a world price that is below the country’s price prior to trade. The lower price causes consumption to rise and production to fall , with the difference being the amount imported.

Equilibrium if

no trade

Imports

Quantity Supplied

Quantity Demanded

Imports – Effects on Price and Quantity

$

Domestic

Supply

Price if

no trade

World

Price

Domestic

Demand

Quantity

gains and losses from imports

Loss to producers

A

Gain to consumers

B

C

D

Imports

Quantity Supplied

Quantity Demanded

Gains and Losses from Imports

$

Domestic

Supply

The consumer surplus

rises from area A to

area A + B + C. The

producer surplus drops

from areas B+ D down

to area D.

Price if

no trade

World

Price

Domestic

Demand

Quantity

gains from exports
Gains from Exports
  • In the case of exports, producers win and consumers lose.
    • Producers win because they sell more at a higher price.
  • Consumers lose because they must pay a higher world price, and thus consume less.
  • On balance, the country as a whole gains from international trade by allowing exports.
  • Both imports and exports lead to more gains than losses.
gains from exports1

Exports result from a

world price that is above

a country’s price prior to

trade. The higher price

causes a country’s

production to rise and

consumption to fall by the

amount being exported.

Equilibrium if

no trade

Exports

Quantity Demanded

Quantity Supplied

Imports – Effects on Price and Quantity

Gains from Exports

$

Domestic

Supply

World

Price

Price if

no trade

Domestic

Demand

Quantity

gains from exports2

Loss to producers

A

B

C

Gain to producers

D

Exports

Quantity Demanded

Quantity Supplied

Gains from Exports

Gains from Exports

$

Domestic

Supply

World

Price

The country’s consumer

surplus drops from areas

A+B to only area A. The

Producer surplus rises

From area D to areas B+

C+D.

Price if

no trade

Domestic

Demand

Quantity

16 2 trade agreements
16.2TRADE AGREEMENTS
  • Countries must choose how wide to open their doors to international trade.
  • An open economy is one that erects no barriers to international trade and investment.
  • A closed economy shuts itself off from foreign investment and trade.
  • Countries design their trade policies with an eye towards their own self interest.
  • Most countries have learned from the Great Depression of the 1930’s that their interest are best served with free trade.
trade agreements
Trade Agreements
  • Most countries have signed the General Agreement on Tariffs and Trade (GATT), which aims to avoid trade wars and promote free trade.
  • The GATT has been administered by the World Trade Organization, an arm of the GATT created to settle trade disputes among GATT members and monitor compliance with provisions of the GATT.
  • The Smoot-Hawley Act of 1930 was passed by the U.S. Congress and imposed high tariffs an imported goods to save jobs.
    • The surprising result of the act was that unemployment was even higher after its imposition.
trade agreements1
Trade Agreements
  • The GATT negotiations required significant tariff reductions.
    • They have also placed restrictions on quotas, which limit the quantity of imported products a country allows.
  • Other non-tariff barriers are also restricted, which is a catch all phrase for the variety of actions a country can take to restrict trade.
trade agreements2
Trade Agreements
  • The Uruguay Round of GATT was ratified by the U.S. and other nations in 1994.
  • It established the WTO, and dealt with the following thorny issues.
    • Tariffs
    • Agricultural subsidies
    • Services
    • Intellectual property rights
regional trade blocs
Regional Trade Blocs
  • The European Union is an example of a regional trading bloc, which is an agreement that lowers trade barriers among member countries.
    • The U.S., Canada, and Mexico have also formed a trading bloc by signing the North American Free Trade Agreement (NAFTA).
  • Trading blocs allows countries to specialize according to comparative advantage, and have a trade creation effect.
  • Trading blocs also have a trade diversion effect, as product flow between trade bloc countries, that may have been traded with non trade bloc countries.
16 3 trade policy options
16.3TRADE POLICY OPTIONS
  • A tariff is a tax on an imported product.
  • Demand for imported products is sometimes referred to as residual demand, since it represents what is left over after consumers have bought from domestic suppliers.
  • Tariffs increase the cost of selling imported products.
    • This in turn increases the cost of imported goods in the domestic market, and reduces the quantity demanded.
tariffs
Tariffs
  • By raising the barriers to entry of foreign products, tariffs can be viewed as a for of price support for domestic producers.
  • The higher price of imports causes the demand curve to shift to the right for domestic products that are close substitutes.
  • Tariffs are said to be transparent, meaning that their effects on prices are clear for all to see.
  • Tariff rates are kept low by GATT.
tariffs1

Tariff raises

price and

lowers quantity

Price rises

Tariff

Imports decline

Tariffs

$

Supply plus tariff

Supply for abroad

U.S. demand for imports

A tariff on imports

helps U.S. producers

who can sell at higher

prices, but hurts consumer

who must pay the higher

price.

Quantity

quotas
Quotas
  • Import quotas are an alternative to imports tariffs and can accomplish the same goals.
  • An import quota restricts the quantity of imports directly, and thus cuts off supply from abroad at the quota quantity.
  • The truncated supply from abroad under a quota leads to an increase in prices at home.
  • GATT limits the extent to which quotas can be imposed by countries.
    • It does allow quotas for agricultural products to avoid disruption to countries’ domestic economies.
quotas1

Quotas reduce the supply of

imports and increase the

domestic price. The quota

truncates supply at the

allowable import quantity,

causing import supply to be

vertical at that point.

A quota can have the same effect as a tariff

Price rises

Quantity allowed by quota

Imports decline

Quotas

Import supply with quota

$

Unrestricted import supply

U.S. demand for imports

Quantity

voluntary export restraints
Voluntary Export Restraints
  • As an alternative to tariffs and import quotas, the U.S. and some other countries have chosen to negotiate voluntary export restraints (VER’s).
  • With VER’s, individual exporting countries agree to limit the quantities they export.
  • The multi-fiber agreement currently scheduled for elimination in 2004, sets country by country quotas on clothing exports to the U.S. and some other countries.
    • The U.S. offers to forego quotas in favor of VER’s to maintain good relations with other governments.
an assortment of non tariff barriers to trade
An Assortment of Non-tariff Barriers to Trade.
  • Most non-tariff barriers to trade do not restrict imports explicitly.
  • Their effects are less obvious than quotas.
  • Paperwork and red tape can inhibit trade.
  • Inspections, which include sampling of imported products can inhibit trade.
16 4 the free trade debate
16.4THE FREE-TRADE DEBATE
  • The objections to free trade commonly have limited applicability or are based on questionable logic.
  • The national defense argument is valid but overused.
    • Translating national defense into policy requires judgments and debate.
  • Trade sanctions restrict trade with nations that have policies that our government opposes.
    • Do trade sanctions punish the wrong people?
the free trade debate
The Free-Trade Debate
  • Some U.S. products are more expensive than foreign products because of the added cost of complying with environmental, health , and safety standards.
    • The U.S. imposes a tariff to achieve a level playing field.
  • Higher level of pollution for some countries is a normal good, since more environmental quality is demanded as the income in a country rises.
  • Poorer countries have a higher opportunity cost of environmental quality, and might specialize in industries with a higher pollution content.
the free trade debate1
The Free-Trade Debate
  • Dumping is defined as the selling of a good for less than it cost to produce.
  • Dumping may occur for many reasons.
    • A company may have overestimated demand for its product, and so for itself stuck with too much product and have a clearance sale.
    • It may be covering its operating expenses, but not the cost of capital or other fixed cost.
  • In these cases, even though the company loses money, it would lose more if it did not sell.
the free trade debate2
The Free-Trade Debate
  • Dumping occurs within a country, as well as in international trade.
  • Dumping is illegal across countries according to the GATT.
  • The U.S. presumes dumping whenever whenever a foreign company charges less in the U.S. than it does at home, irrespective of its cost.
  • Strategic dumping is dumping that aims to drive the competition out of business so that the firms doing the dumping can monopolize output and drive prices up in the future.
the free trade debate3
The Free-Trade Debate
  • Developing countries often try to nurture new industries they hope will one day become the source of export earnings.
  • These infant industries are thought to need protection in the rough world marketplace.
  • The infant industry argument unconvincing if markets function efficiently.
  • In the free marketplace, venture capitalist and other private investors will often support firms through many years of losses.
  • Governments around the world support infant industries that never grow up.
the free trade debate4
The Free-Trade Debate
  • By requiring government subsidies to stay afloat, and by charging prices above those in the rest of the world, such infant industries have proven to be expensive for governments and consumers alike.
28 4 explore apply energy security
28.4 EXPLORE & APPLYEnergy Security
  • The U.S. economy consumes tremendous amounts of oil.
    • About 777 million gallons per day as of January 2002.
  • The U.S. is vulnerable to political instability in the middle east and in other oil-exporting countries.
  • The U.S. is a source of income to Middle Eastern countries with interest hostile to those of the U.S.
energy security
Energy Security
  • The external cost of imports are not reflected in the price paid by importers.
  • To internalize them, the U.S. could impose an oil import fee.
    • An oil import fee is a common name for a tariff when applied to oil.
  • Since oil is a non-renewable resource, opponents of oil import fees say such a fee would “drain” America first.
terms along the way
free trade

open economy

General Agreement on Tariffs and Trade (GATT)

World Trade Organization (WTO)

tariff

Smoot-Hawley Act

quotas

non-tariff barriers

trading bloc

North American Free Trade Agreement

trade creation effect

Terms Along the Way
terms along the way continued
trade diversion effect

voluntary export restraints

Dumping

strategic dumping

infant industries

Terms Along the Way (continued)
test yourself
Test Yourself
  • When a country imports a good, it will
  • gain more in consumer surplus than it loses in producer surplus.
  • gain more in producer surplus than it loses in consumer surplus.
  • find that its gain of consumer surplus is exactly offset by its loss of producer surplus.
  • Find that its gain of producer surplus is exactly offset by its loss of consumer surplus.
test yourself1
Test Yourself

2. The GATT was created in response to

  • the Great Depression of the 1930’s.
  • the cold war of the 1950’s and 1960’s.
  • Reagonomics, the economic policies of President Regan in the 1980’s.
  • President Clinton’s desire to forge closer relationships with China in the 1990’s.
test yourself2
Test Yourself

3. The World Trade Organization

  • is a trading bloc that consist of the United States and the countries of Japan and China.
  • has many member countries, but not the United States.
  • competes with GATT for members, with about half the world’s countries belonging to the GATT and the other half belonging to the World Trade Organization.
  • is a component of the GATT that administers the GATT Agreement.
test yourself3
Test Yourself

4. An import tariff shifts the _________ curve of imports upward and __________ the price of the good paid by the consumer.

  • supply;increases
  • supply;decreases
  • demand;decreases
  • demand;increases
test yourself4
Test Yourself

5. Which is an example of a voluntary export restraint?

  • A tariff.
  • A quota.
  • The multi-fiber agreement.
  • The GATT.
test yourself5
Test Yourself

6. Which of the following is NOT offered as a reason to restrict trade?

  • Infant industries.
  • Dumping.
  • Level playing field.
  • Comparative advantage.
slide40

The End!

Next Chapter 17

“Economic Development"