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Chapter 33

Chapter 33. Comparative Advantage and the Open Economy. Did You Know That. Each year, U.S. residents spend more than $5 million on U.S. flags manufactured outside the United States. This figure may fall somewhat in future years, however, if some state governments have their way.

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Chapter 33

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  1. Chapter 33 Comparative Advantage and the Open Economy

  2. Did You Know That... Each year, U.S. residents spend more than $5 million on U.S. flags manufactured outside the United States. This figure may fall somewhat in future years, however, if some state governments have their way. Some state governments have made it illegal to sell U.S. flags manufactured outside of the United States. What effects do restrictions on imports have on quantities and prices of domestically produced goods and services?

  3. The Worldwide Importance of International Trade World GDP today is nearly nine times greater than it was at the end of World War II. World trade has increased to more than 28 times what it was in 1950.

  4. Figure 33-1 The Growth of World Trade, Panel (a) Source: Steven Husted and Michael Melvin, International Economics, 3rd ed. (New York: HarperCollins, 1995), p. 11, used with permission; World Trade Organization; Federal Reserve System; U.S. Department of Commerce.

  5. Figure 33-1 The Growth of World Trade, Panel (b) Source: Steven Husted and Michael Melvin, International Economics, 3rd ed. (New York: HarperCollins, 1995), p. 11, used with permission; World Trade Organization; Federal Reserve System; U.S. Department of Commerce.

  6. International Example: Have Seafood, Will Travel • U.S. restaurants strive to offer fresh seafood, which often requires some kinds of seafood to be shipped long distances. • Lobsters caught in Nova Scotia take a 30-hr truck ride to Kentucky before being shipped to restaurants across the U.S. • Nile perch travel as much as 8,000 miles before reaching their destination. • Some critics claim that international trade causes nations to “lose jobs.” Why do you think that workers in the Nile perch industry might disagree with this statement?

  7. Why We Trade: Comparative Advantage and Mutual Gains From Exchange We have learned about the concept of specialization and the mutual gains from trade. We can understand gains from trade among nations by understanding output gains from specialization between individuals.

  8. Why We Trade: Comparative Advantage and Mutual Gains From Exchange (cont'd) Scenario (8-hour day, one farm, 2 workers) Eddie Picks 2 pounds of apples/hour Picks 1 pound of oranges/hour Connie Picks 1 pound of applies/hour Picks 1 pound of oranges/hour

  9. Why We Trade: Comparative Advantage and Mutual Gains From Exchange (cont'd) Eddie Connie Total 12 4 hrs  2 = 8 4 hrs  1 = 4 8 4 hrs  1 = 4 4 hrs  1 = 4 Apples Oranges Without Trade (8-hour day, lbs)

  10. Why We Trade: Comparative Advantage and Mutual Gains From Exchange (cont'd) Eddie Connie Total 16 8 8 hrs  2 = 16 Apples Oranges 8 hrs  1 = 8 With Trade (8-hour day, lbs) Eddie output increases by 4 lbs per day

  11. Why We Trade: Comparative Advantage and Mutual Gains From Exchange (cont'd) Comparative Advantage The ability to produce a good or service at a lower opportunity cost compared with producers $1,000,000/hr Why doesn’t Tiger Wood mow his lawn? $7.25/hr

  12. Why We Trade: Comparative Advantage and Mutual Gains From Exchange (cont'd) Eddie Connie 0.5 lb. oranges 1 lb. oranges 1 lb. apples 2 lb. apples 1lb Apples 1lb Oranges Opportunity Cost Eddie has a lower opportunity cost in picking apples than Connie.

  13. Why We Trade: Comparative Advantage and Mutual Gains From Exchange (cont'd) Specialization is the key Specializing in producing goods for which a nation has a comparative advantage allows for greater efficiency. Production capabilities increase, making possible greater worldwide consumption through international trade. Why Eddie should specialize in picking apples, Connie in picking oranges?

  14. Why We Trade: Comparative Advantage and Mutual Gains From Exchange (cont'd) Questions (Food for thought) Why the majority of chefs are males, but then why they let their wives cook? Why does your professor let a TA proctor the exam?

  15. Why We Trade: Comparative Advantage and Mutual Gains From Exchange (cont'd) Observations on specialization and trade Not everyone gains from trade. Every country will always have a comparative advantage in something.

  16. Figure 33-2 World Trade Flows

  17. The Relationship Between Exports and Imports In the long run, imports are paid for by exports. Any restrictions on imports ultimately reduce exports. When a country engages in trade, it is not competing against the other countries. All nations stand to benefit from trade.

  18. International Competitiveness Questions Is the United States falling behind? Do we need to stay competitive internationally? What does global competitiveness really mean?

  19. International Competitiveness (cont'd) Answers The United States leads in overall productive efficiency • Reasons for this ranking: • Widespread entrepreneurship • Economic restructuring • Investment in information-technology • Sophisticated financial system • Large investments in scientific research

  20. Arguments Against Free Trade Infant Industry Argument The contention that tariffs should be imposed to protect from import competition an industry that is trying to get started Presumably, after the industry becomes technologically efficient, the tariff can be lifted.

  21. Arguments Against Free Trade (cont'd) Countering foreign subsidies and dumping Dumping Selling a good or a service abroad below the price charged in the home market or at a price below its cost of production

  22. Arguments Against Free Trade (cont'd) Protecting domestic jobs Do imports reduce jobs? Gould/Woodbridge/Ruffin study – no casual link between the rate of imports and unemployment. In half of the cases studied, when imports rose, unemployment fell. <$1/hour >$18/hour

  23. Arguments Against Free Trade (cont'd) The cost of protecting U.S. jobs Restrictions on textiles and apparel goods cost U.S. consumers $9 billion a year. Cost $50,000 a year for each $20,000 job saved Restriction on imports of Japanese cars Cost $160,000 per year for each job saved in the auto industry • Steel industry restrictions • Cost $750,000 per year per job saved

  24. More Valid Arguments Against Free Trade Emerging arguments against free trade Environmental concerns Genetic engineering (toxic contaminants, paint lead, health hazardous materials) National defense Exports of new technology

  25. Ways to Restrict Foreign Trade (cont’d) • All of these trade agreement obligations were carried out under the General Agreement on Tariffs and Trade (GATT) • An international agreement established in 1947 to further world trade by reducing barriers and tariffs. • The GATT was replaced by the World Trade Organization in 1995.

  26. Figure 33-5 Tariff Rates in the United States Since 1820 Source: U.S. Department of Commerce.

  27. Myth #33: America has lost its edge • If so, why so many people continue to come to this country, legally or illegally?

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