Chiang 3e Lect Ppt Ch 26 Econ Ch 16 Micro Ch 15 Macro

8/10/2019 Chiang 3e Lect Ppt Ch 26 Econ Ch 16 Micro Ch 15 Macro

1/48

CHAPTER 15 (26):

INTERNATIONAL TRADE

COREECONOMICS, 3RD EDITION BY ERIC CHIANG

Slides by Debbie Evercloud

2013 Worth PublishersCoreEconomics Chiang/Stone

1 of 48

TatianaNikolaevna

Kalashnikova/Getty

Images


2/48


3/48

LEARNING OBJECTIVES

At the end of this chapter, the student will

be able to:

Describe the benefits of free trade

Distinguish between absolute and

comparative advantage

Describe the economic impacts of trade

Define the terms of trade

2013 Worth PublishersCoreEconomics Chiang and Stone

3 of 48


4/48

LEARNING OBJECTIVES

At the end of this chapter, the student will

be able to:

List the ways in which trade is restricted

Discuss the various arguments against free

trade

Debate the issues surrounding increasing

global economic integration


4 of 48


5/48

EXAMPLE: IMPORTS AND

EXPORTS Take a quick look at your closet, and count

how many countries contributed to your

wardrobeshirts tailored in Hong Kong,

shoes made in Italy, sweaters made inNorway, jackets made in China, and so on.


5 of 48


6/48

EXAMPLE: IMPORTS AND

EXPORTS What do American firms export to the rest

of the world?

Goods: commercial airplanes, cars and

trucks, tractors, high-tech machinery,

pharmaceuticals, agricultural goods, and raw

materials, such as soybeans and copper

Services: medical services, tourist services,higher education, and entertainment,

including movies, software, and music


6 of 48


7/48

BY THE NUMBERS: CHINA


7 of 48


8/48

GAINS FROM TRADE

A country that does not trade at all is

called an autarky.

Those countries that trade the least are

called closed economies.

Most countries are open economies that

willingly and actively engage in trade with

other nations.


8 of 48


9/48

GAINS FROM TRADE

Trade consists of imports, goods and

services purchased from other countries,

and exports, goods and services sold

abroad.


9 of 48


10/48

VOLUNTARY TRADE

Many people assume that trade between

nations is a zero sum game: a game in

which, for one party to gain, the other

party must lose.


But voluntary exchange is in fact a

positive sum game, meaning that bothparties to a transaction can gain.

10 of 48


11/48

ABSOLUTE AND COMPARATIVEADVANTAGE

An absolute advantage exists when onecountry can produce more of a good thananother country.

One country enjoys a comparativeadvantage in producing a particular goodif it can do so at the lowest opportunitycost.

If each country specializes according to itscomparative advantage, both nations can bemade better off through trade.


11 of 48


12/48


13/48

COMPARATIVE ADVANTAGE

Both countries can be made better off by

specializing according to their comparative

advantage.

Canada will produce beef.

The United States will produce some beef and

some guitars.


13 of 48


14/48

PRACTICAL CONSTRAINTS ON

TRADE Some practical constraints on trade:

Every transaction involves costs, includingtransportation, communications, and thegeneral costs of doing business.

Over the last several decades, however,transportation and communication costshave declined.


14 of 48


15/48


16/48

EFFECTS OF VOLUNTARY

TRADE Although it is true that trading partners will

benefit from trade, some individuals and

groups within each country may lose.


16 of 48


17/48

CHECKPOINT: THE GAINS FROM

TRADE

A comparative advantage exists when one

country can produce a good at a lower

opportunity cost than another country.

Both countries gain from trade when each

specializes in producing goods in which

they have a comparative advantage.


17 of 48


18/48

THE TERMS OF TRADE

When countries trade many commodities,

the terms of trade are defined as the

average price of exports divided by the

average price of imports.

As a country devotes more resources to

producing one particular item, it will encounter

increasing opportunity costs.As each product settles into an equilibrium

price, the terms of trade are established.


18 of 48


19/48

WINNERS AND LOSERS

IN FREE TRADE

With free trade, some sectors of the

economy win and others lose.

American consumers have been happy to

purchase Korean televisions, such asSamsung and LG.

American television manufacturers have not

been so pleased. These firms have had toadapt to overseas competition.


19 of 48


20/48

WINNERS AND LOSERS

IN FREE TRADE

As textile production has been relocated tolow-wage countries, American consumershave enjoyed a substantial drop in theprice of clothing.

Still, being able to purchase inexpensiveimported clothes is small consolation for

the unemployed textile workers in NorthCarolina.


20 of 48


21/48


22/48

TARIFFS

Tariffs are often ad valorem taxes.

This means the product is taxed by a certain

percentage of its price as it crosses the

border.

Other tariffs are unit taxes, in which a fixed

tax per unit of the product is assessed at

the border.


22 of 48


23/48

EFFECT OF A UNIT TARIFF


Quantity in thousands

Pricein$

2 4

S

D

400

600

500

With a tariff, domestic

consumers pay more than

otherwise. Some of this added

expense is collected by domestic

producers. The shaded arearepresents the amount of

government revenue

collected.

3

23 of 48


24/48

QUOTAS

Under a quota system, the governmentlimits imports to a specified quantity.

No revenue is collected for the government,

but prices are higher because of the restrictedquantity.

This translates into more profit for themanufacturer.


24 of 48


25/48


26/48

EFFECT OF A QUOTA


Quantity in thousands

Pricein$

2 4

S

D

400

600

500

A quota is a restriction

on the quantity of imports.

The domestic price will rise to

the market-clearing level,

but no revenue is collectedfor the government.

Quota

3

26 of 48


27/48

ISSUE: FOREIGN TRADE ZONES

A foreign trade zone is a designated area

in a country in which foreign companies

can import inputs, without tariffs, to be

used for product assembly by localworkers.

The workers are often paid a fraction of

what equivalent workers would be paid inthe companys home country.


27 of 48


28/48

ISSUE: FOREIGN TRADE ZONES

What may be surprising, however, is that

foreign trade zones are not limited to

developing countries with low labor costs.

The United States has many foreign trade

zones established for the same purpose:

to attract foreign companies to invest in

manufacturing plants.


28 of 48


29/48

CHECKPOINT: TERMS OF

TRADE The terms of trade are determined by the

ratio of the price of exported goods to the

price of imported goods.

Tariffs are taxes on imports that protect

domestic producers and generate revenue

for the government.

Quotas restrict the volume of particular

imports that can come into a country.


29 of 48


30/48

ARGUMENTS AGAINSTFREE TRADE

Antifree trade arguments fall into twocamps:

Traditional economic arguments Globalization concerns


30 of 48


31/48

TRADITIONAL ECONOMIC

ARGUMENTS

The Infant Industry Argument

An infant industry is one so underdeveloped

as to not be able to survive in the global

environment. Unless the industrys government provides it

with some protection through tariffs, quotas,

or subsidies, it might not survive in the face of

foreign competition.


31 of 48


32/48


33/48


ARGUMENTS

Drawbacks of the Infant Industry

Argument:

Second, infant industry protection tends to

focus on capital manufacturing.

Third, many industries seem to be able to

develop without protections, so countries may

be wasting their resources and reducing theirincomes by imposing protection measures.


33 of 48


34/48


ARGUMENTS

Antidumping Argument:

Dumping means that goods are sold at lower

prices (perhaps below cost) abroad than in their

home market. This often is a result ofgovernment subsidies.


34 of 48


35/48


36/48


ARGUMENTS

Low Foreign Wages:

Some advocates of trade barriers maintain

that domestic firms and workers need to be

protected from cheap foreign labor.


On balance, however, the benefits of lower-

priced goods considerably exceed the costs

of lost employment.

36 of 48


37/48


ARGUMENTS

National Defense:

In times of national crisis, the United States

must rely on key domestic industries, such as

oil, steel, and the defense industry. Some argue that these industries may require

protection even during peacetime to ensure

that they are already well established if a

crisis prevents importing key products.


37 of 48


38/48


39/48

GLOBALIZATION CONCERNS

Trade and the Environment:

Concerns that expanded trade will lead toincreased environmental degradation as

companies take advantage of laxenvironmental laws in the developing world

Fears that environmental laws will be viewedas disguised protectionism


39 of 48


40/48


41/48


Trade and the Environment:

As professors Bhagwati and Hudec argue,there has been no systematic race to the

bottom. Many corporations often have the highestenvironmental and labor standards in thedeveloping world.


41 of 48


42/48


43/48


Working Conditions in DevelopingNations:

Some anti-globalization activists argue that

trade with developing countries simplyexploits workers where wages are low.

But it is not clear that workers would behelped if the United States were to cut off its

trade with low-wage countries.


43 of 48


44/48

CHECKPOINT:ARGUMENTS AGAINST FREE TRADE

The infant industries argument claims that

some industries need protection to survive

in a global competitive environment.

Dumping involves selling products at lower

prices in foreign markets, often with the

help of subsidies from the government.

Some argue that domestic workers needprotection from low wages overseas.

2013 Worth PublishersCoreEconomics Chiang and Stone44 of 48


45/48

CHECKPOINT:ARGUMENTS AGAINST FREE TRADE

Globalization has meant that some U.S.

workers have lost jobs to foreign

competition.

The overall effect of international trade has

been to increase overall employment.

Concern about the environment is often a

factor in trade negotiations.

2013 Worth PublishersCoreEconomics Chiang and Stone 45 of 48


46/48

CHAPTER SUMMARY

Voluntary exchange is a positive sum game,

meaning that both parties to a transaction can

benefit.

International trade is based on the principle ofcomparative advantage.

The terms of trade are defined as the average

price of exports divided by the average price of

imports.



47/48

CHAPTER SUMMARY

The most common forms of trade restrictions are

tariffs and quotas.

The traditional economic arguments against free

trade include the following: Infant industries

Antidumping

Key industries

Environmental degradation

Protection against cheap labor



48/48

DISCUSSION QUESTIONS

Take a look at the items in your backpack.

How many of them were made in other

countries? What about the backpack itself?

Explain the way in which a country canbenefit from trading with other countries that

are less productive overall.

Does an increase in international tradethreaten the national security of the United

States?

Chiang 3e Lect Ppt Ch 26 Econ Ch 16 Micro Ch 15 Macro

Documents