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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.

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Chapter 20

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  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

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