International Trade

International Trade What is an export? What is an Import?

How much is traded? Year Exports Imports Difference 1970 57.9 55.8 ____ 1980 280.8 293.8 ____ 1990 552.4 629.7 ____ 1995 811.9 902.6 ____ 2000 1093.2 1475.3 ____ 2005 1035.1 2027.8 ____ 2010 1839.8 2356.7 ____ 2011 2087.6 2665.8 ____

What is traded? Exports 1985% 2010% Foods, feeds, beverages 11.08.4 Industrial supplies 26.7 30.6 Capital goods 33.834.9 Automotive 10.58.8 Non-Food consumer goods 5.813.0

What is traded? Imports 1985% 2010% Foods, feeds, beverages 6.54.8 Industrial supplies 33.8 31.5 Capital goods 19.323.5 Automotive 19.911.8 Non-Food consumer goods 20.325.3

Who do we trade with? Partner% Exports Partner% Imports Canada Mexico China Japan England Germany S. Korea Brazil Netherlands Hong Kong China Canada Mexico Japan Germany S. Korea England Saudi Arabia Venezuela Taiwan 19.0 13.3 7.0 4.5 3.8 3.3 2.9 3.2 2.5 2.1 17.4 14.3 11.9 5.8 4.5 2.6 2.3 2.2 2.0 1.9

Why do we trade? Specialization Comparative Advantage

Comparative Advantage Areas that have an advantage in production of a good?

Production Possibilities Bonsai Areca Guns Butter • 0 • 2 • 4 0 6 Guns Butter • 0 12 1 • 2 • 3 0 4 Guns Guns Butter Butter

International Example Production Possibilities - Mexico 1 S = __ A 1 A = __ S Production Possibilities - US 1 S = __ A 1 A = __ S US should produce? Mexico should produce? Terms of Trade? ___ A for ___ S

Comparative Advantage With one unit of resources: - China: 2 tons of wheat or 4 tons of rice -Hungary: 4 tons of wheat or 4 tons of rice Opportunity Costs: China 1 t wheat = ___ ton rice 1 t rice = ___ ton wheat China Hungary 1 t wheat = ___ ton rice 1 t rice = ___ ton wheat Hungary Advantage in wheat? __________ Advantage in rice? __________

With one unit of resources: -Hungary: 4 wheat or 4 rice - China: 2 wheat or 4 rice With two units of resources, 1 for wheat 1 for rice: - China: __ wheat and __ rice -Hungary: __ wheat and __ rice Totals: __ wheat and __ rice With two units of resources, produce good with comparative advantage - China: __ wheat and __ rice -Hungary: __ wheat and __ rice Totals: __ wheat and __ rice

Free Trade vs Protectionism Tariff- Quota- Embargo- Dumping-

Imports after tariff Tariff =t S U T V Initial imports Trade Restrictions: Impact of a Tariff. • Consider a tariff on autos imports. • Without a tariff, the world price of autos is Pw. At Pw consumers in the U.S. purchase Q1 units … Price SDomestic Qd1 from U.S. producers and … Q1 – Qd1 from foreign producers. • A tariff t makes it more costly for Americans to purchase autos from abroad. U.S. prices rise to Pw+ t and purchases fall from Q1 to Q2. Pw+ t • U.S. purchases from domestic producers rise from Qd1 to Qd2 … Pw imports fall to Q2 – Qd2. DDomestic • Producers gain area S … the tariff generates T tax revenues for the government… Quantity(automobiles) Qd1 Qd2 Q2 Q1 areas U & V are deadweight losses from reduction in allocative efficiency.

Import quota:Q2 – Qd2 S U T V Initial imports Note: The government derives no additional revenue from quotas. Trade Restrictions: Impact of a Quota • Consider a quota on peanuts. • Without trade restraints, Pw(the world price of peanuts) would be the domestic price. At Pw U.S. consumers would purchase Q1 … Price SDomestic Qd1 from U.S. producers and … Q1 – Qd1 imported from abroad. • A quota of Q2 – Qd2 imports pushes the U.S. price up to P2. P2 • While total U.S. purchases fall (from Q1 to Q2), those from U.S. producers rise (from Qd1 to Qd2) and … Pw imports fall to Q2– Qd2. • U.S. producers gain area S. Area T goes to foreign producers with permits to import into the U.S. DDomestic Quantity(peanuts) Qd1 Qd2 Q2 Q1 • U & V are deadweight losses.

Import quota:Q2 – Qd2 Imports after tariff Tariff =t S S U U T T V V Initial imports Initial imports Trade Restriction Impacts Price Price SDomestic SDomestic P2 Pw+ t Pw Pw DDomestic DDomestic Quantity(peanuts) Quantity(automobiles) Qd1 Qd1 Qd2 Q2 Qd2 Q1 Q2 Q1

Free Trade Arguments for: 1. Specialization- 2. More goods, lower prices 3. Competition

Protectionism Arguments for: 1. Infant industries- 2. Domestic employment- 3. Diversification- 4. National security-

Examples Positive IMF - loans and financial assistance GATT / WTO- tariff reductions EU - European free trade area NAFTA - North American free trade area

True orFalse

The purchase of goods and services from abroad is called exporting. • The largest category of U.S. exports is foods and beverages. • 3. The country with which the United States carries on the largest amount of international trade is Canada • 4. The scarcity problem can be eliminated by increasing production through specialization. • 5. A country is said to have a comparative advantage over another country if it can produce a product at a lower opportunity cost than can the other country 6. The availability of appropriate markets and the ability to trade are necessary if countries are to specialize in their production 7. Trade restrictions must be imposed between countries if they are to gain the full benefits of production according to comparative advantage.

8. A total ban on imports from another country is a quota. 9. A tariff is a restriction on the quantity of a product that can enter a country. 10. The complete prohibition of trade in a particular commodity with a particular nation is called an embargo 11. The prices and availabilities of goods and services should be lower with free trade than with restricted trade 12. One of the protectionist arguments is that trade restrictions should be imposed to ensure national security 13. The sale of a product in a foreign market at a price below cost is called dumping 14. Negotiations under the General Agreement on Tariffs and Trade have resulted in lower tariffs between nations

International Trade