17 International Trade and Comparative Advantage No nation was ever ruined by trade. BENJAMIN FRANKLIN International Trade and Comparative Advantage No.
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17
International Trade and Comparative Advantage
No nation was ever ruined by trade.BENJAMIN FRANKLIN
● Why Trade?
● International versus Intranational Trade
● The Law of Comparative Advantage
● Supply, Demand, and Pricing in World Trade
● Tariffs, Quotas, and Other Interferences with Trade
● Why Trade?
● International versus Intranational Trade
● The Law of Comparative Advantage
● Supply, Demand, and Pricing in World Trade
● Tariffs, Quotas, and Other Interferences with Trade
ContentsContents
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
● Why Inhibit Trade?
● Can Cheap Imports Hurt a Country?
● Why Inhibit Trade?
● Can Cheap Imports Hurt a Country?
Contents (continued)Contents (continued)
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
TABLE 1: Labor Costs in Industrialized Countries
TABLE 1: Labor Costs in Industrialized Countries
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
Why Trade?Why Trade?
● Reasons countries benefit from foreign trade♦ They can import resources they lack at home.
♦ They can import goods for which they are a relatively inefficient producer.
♦ Specialization sometimes permits economies of large-scale production.
● Reasons countries benefit from foreign trade♦ They can import resources they lack at home.
♦ They can import goods for which they are a relatively inefficient producer.
♦ Specialization sometimes permits economies of large-scale production.
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● Mutual Gains from Trade♦ When trade is voluntary:
■Both sides must expect to gain from it■Otherwise, they would not trade
● Mutual Gains from Trade♦ When trade is voluntary:
■Both sides must expect to gain from it■Otherwise, they would not trade
Why Trade?Why Trade?
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● International and intranational trade are similar in many respects.
● International and intranational trade are similar in many respects.
International versus Intranational TradeInternational versus Intranational Trade
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● Why international trade is studied separately:♦ Countries are governed by separate
governments♦ International trade involves the exchange of
national currencies♦ Labor and capital are less mobile
internationally than they typically are within a country
● Why international trade is studied separately:♦ Countries are governed by separate
governments♦ International trade involves the exchange of
national currencies♦ Labor and capital are less mobile
internationally than they typically are within a country
International versus Intranational TradeInternational versus Intranational Trade
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The Law of Comparative AdvantageThe Law of Comparative Advantage
● One country is said to have an absolute advantage over another in the production of a particular good if it can produce that good using smaller quantities of resources than can the other country.
● One country is said to have an absolute advantage over another in the production of a particular good if it can produce that good using smaller quantities of resources than can the other country.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● One country is said to have a comparative advantage over another in the production of a particular good if it produces that good less inefficiently than the other country.
● One country is said to have a comparative advantage over another in the production of a particular good if it produces that good less inefficiently than the other country.
The Law of Comparative AdvantageThe Law of Comparative Advantage
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
The Law of Comparative AdvantageThe Law of Comparative Advantage
● The law of comparative advantage applies even if one country is at an absolute disadvantage relative to another country in the production of every good.
● The law of comparative advantage applies even if one country is at an absolute disadvantage relative to another country in the production of every good.
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The Law of Comparative AdvantageThe Law of Comparative Advantage
● Both countries gain from trade even if one of them is more efficient than the other in producing everything.
● Both countries gain from trade even if one of them is more efficient than the other in producing everything.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
The Law of Comparative AdvantageThe Law of Comparative Advantage
● The Arithmetic of Comparative Advantage♦ When countries differ in the relative efficiency
with which they produce different goods: ■Both world output and the welfare of each country
can be increased if: ● Each country specializes in producing the goods for
which it has a relative advantage;
● And then trades with the other.
● The Arithmetic of Comparative Advantage♦ When countries differ in the relative efficiency
with which they produce different goods: ■Both world output and the welfare of each country
can be increased if: ● Each country specializes in producing the goods for
which it has a relative advantage;
● And then trades with the other.
TABLE 2: Alternative Outputs from One Year of Labor Input
TABLE 2: Alternative Outputs from One Year of Labor Input
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
TABLE 3: Example of the Gains from Trade
TABLE 3: Example of the Gains from Trade
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
The Law of Comparative AdvantageThe Law of Comparative Advantage
● The Graphics of Comparative Advantage♦ Production possibilities frontiers for two
countries can show: ■Different opportunity costs■The potential gains from trade
● The Graphics of Comparative Advantage♦ Production possibilities frontiers for two
countries can show: ■Different opportunity costs■The potential gains from trade
FIGURE 1: Per-Capita PPFs for Two Countries
FIGURE 1: Per-Capita PPFs for Two Countries
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
60
U.S. production possibilities frontier
S N
J
60
50
40
30
10
Japanese production possibilities frontier
10 0 20 30 40 50
20
Tel
evi
sio
n S
ets
(mil
lio
ns)
Computers (millions)
U
FIGURE 2: The Gains from TradeFIGURE 2: The Gains from Trade
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
U
U.S. production possibilities
100
90
80
70
60
50
40
30
20
10
A
60 50 40 20 10
U.S. consumption possibilities
S
30 0
Te
lev
isio
n S
ets
Computers
(b) United States
Japanese production possibilities
100
90
80
70
60
50
40
30
20
10
J
60 50 40 20 10
Japanese consumption possibilities
P N
30 0
Te
lev
isio
n S
ets
Computers
(a) Japan
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Comparative Advantage: “Cheap Foreign Labor”Comparative Advantage: “Cheap Foreign Labor”
● A country can benefit from trade, even if wages in the other country are considerably lower than its own wages.
● A country can benefit from trade, even if wages in the other country are considerably lower than its own wages.
??
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Tariffs, Quotas, and Other Interferences with TradeTariffs, Quotas, and Other Interferences with Trade
● Countries can reduce imports by setting tariffs or quotas.
● They can promote exports by subsidizing export goods.
● Countries can reduce imports by setting tariffs or quotas.
● They can promote exports by subsidizing export goods.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
Tariffs, Quotas, and Other Interferences with TradeTariffs, Quotas, and Other Interferences with Trade
● Tariff = tax on imports
● Quota = legal limit on the amount of a good that may be imported
● Export subsidy = government payment to an exporter
● Tariff = tax on imports
● Quota = legal limit on the amount of a good that may be imported
● Export subsidy = government payment to an exporter
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
Tariffs, Quotas, and Other Interferences with TradeTariffs, Quotas, and Other Interferences with Trade
● Tariffs versus Quotas♦ When imports are to be reduced, tariffs are
generally preferable to quotas because:■Tariffs generate income for the government■Unlike quotas, tariffs offer no special benefits to
inefficient exporters
● Tariffs versus Quotas♦ When imports are to be reduced, tariffs are
generally preferable to quotas because:■Tariffs generate income for the government■Unlike quotas, tariffs offer no special benefits to
inefficient exporters
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Reasons why countries may restrict trade:♦ Gain a price advantage
♦ Protect particular industries
♦ National defense and other non-economic reasons
♦ Infant-industry argument
♦ Strategic trade policy
● Reasons why countries may restrict trade:♦ Gain a price advantage
♦ Protect particular industries
♦ National defense and other non-economic reasons
♦ Infant-industry argument
♦ Strategic trade policy
Why Inhibit Trade?Why Inhibit Trade?
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Why Inhibit Trade?Why Inhibit Trade?
● But retaliation may eliminate their advantage and make all countries worse off.
● But retaliation may eliminate their advantage and make all countries worse off.
TABLE 4: Estimated Costs of Protectionism to Consumers
TABLE 4: Estimated Costs of Protectionism to Consumers
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
How Popular Is Protectionism?How Popular Is Protectionism?
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
37%
56%
42%
Free traders
Protectionists
47%
Per
cen
tag
e
United States World
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
● Dumping = selling goods in a foreign market at lower prices than those charged in the home market
● Cheap imports: ♦ Benefit consumers
♦ Hurt some domestic businesses and their workers
● Dumping = selling goods in a foreign market at lower prices than those charged in the home market
● Cheap imports: ♦ Benefit consumers
♦ Hurt some domestic businesses and their workers
Can Cheap Imports Hurt a Country?Can Cheap Imports Hurt a Country?
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
Can Cheap Imports Hurt a Country?Can Cheap Imports Hurt a Country?
● Those who are hurt by cheap imports may fight to prevent their losses.
● Politics often leads to the adoption of protectionist measures that would be rejected on strictly economic terms.
● Those who are hurt by cheap imports may fight to prevent their losses.
● Politics often leads to the adoption of protectionist measures that would be rejected on strictly economic terms.
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
A Last Look at the “Cheap Foreign Labor” ArgumentA Last Look at the “Cheap Foreign Labor” Argument
● Labor is cheap in countries where productivity is low.
● Labor is expensive in countries like the United States where labor productivity is high.
● Labor is cheap in countries where productivity is low.
● Labor is expensive in countries like the United States where labor productivity is high.
??
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A Last Look at the “Cheap Foreign Labor” ArgumentA Last Look at the “Cheap Foreign Labor” Argument
● Under most circumstances, international trade enhances our standard of living.
● Under most circumstances, international trade enhances our standard of living.
??
Appendix: Supply, Demand, and Pricing in
World Trade
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Supply, Demand, and Pricing in World TradeSupply, Demand, and Pricing in World Trade
● In a two-country supply-demand model without trade restrictions:♦ The price of a good must be the same in both
countries
♦ The quantity of a good exported from one country must equal the quantity imported by the other
● In a two-country supply-demand model without trade restrictions:♦ The price of a good must be the same in both
countries
♦ The quantity of a good exported from one country must equal the quantity imported by the other
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
FIGURE 3: Supply-Demand in the International Wheat Trade
FIGURE 3: Supply-Demand in the International Wheat Trade
Pri
ce
of
Wh
ea
t p
er
Bu
sh
el
Importing country’s
supply
Importing country’s demand
Quantity of Wheat
(b) Importing Country
0
Imports
C D
H G
Pri
ce
of
Wh
ea
t p
er
Bu
sh
el
2.50
$3.25
Exporting country’s
supply
Exporting country’s demand
Quantity of Wheat
(a) Exporting Country
0
Exports
A B
F E
Copyright© 2006 Southwestern/Thomson Learning All rights reserved.
Supply, Demand, and Pricing in World TradeSupply, Demand, and Pricing in World Trade
● How Tariffs and Quotas Work♦ Both tariffs and quotas
price of imports quantity of imports
♦ Any restriction of imports that is accomplished by a quota normally can also be accomplished by a tariff
● How Tariffs and Quotas Work♦ Both tariffs and quotas
price of imports quantity of imports
♦ Any restriction of imports that is accomplished by a quota normally can also be accomplished by a tariff
FIGURE 4: Quotas and Tariffs in International Trade
FIGURE 4: Quotas and Tariffs in International Trade
Copyright © 2006 South-Western/Thomson Learning. All rights reserved.
95 87.5 57.5 50 125 115 85 80
2.50
$3.25
Importing country’s
supply
Importing country’s demand
Quantity of Wheat
(b) Importing Country
0
C D
T Q
Pri
ce
of
Wh
ea
t p
er
Bu
sh
el
Pri
ce
of
Wh
ea
t p
er
Bu
sh
el
2.00
$2.50
Exporting country’s
supply Exporting country’s demand
Quantity of Wheat
(a) Exporting Country
0
R
A
S
B
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