International Trade: Agricultural Goods and Comparative Advantage

1. Chapter 14: Trade in Agricultural Goods International Trade

2. Basis for International Trade Countries should specialize in production for which they have a Comparative advantage Why does the U.S. import products requiring large amounts of hand labor? Oriental rugs Weaving, baskets, etc.

3. Labor is cheap in countries producing these products Products require little capital investment Americans value hand-made goods Hand-made goods expensive given U.S. wage rates Value of your grandmother's time Couldn't set up an efficient factory to produce hand-sewn items in U.S. U.S. imports items from countries with a comparative advantage in producing hand-made goods

4. U.S. also imports high-tech items VCR's TV sets Camcorders 88 92 96 100 104 108 CD players Electronics industry established in places like Korea Taiwan Singapore Japan JAPAN Investment in automated, efficient plants

5. SOUTH AMERICA US exports agricultural commodities Capital-intensive, low cost production of crops Traditionally, the U.S. is the efficient producer Comparative advantage in crops, beef, dairy More threat from foreign competition for Labor-intensive crops Tobacco Horticultural crops Agriculture improving in much of rest of world Soybeans--Brazil BRAZIL Wheat-Saudi Arabia

6. SALE Korea: LG CHINA Samsung Cheaper, but labor rates increasing KOREA Not all made in Korea Korean-owned firms “Japanese” electronics almost never made in Japan Japanese electronics sourced around the world

7. Why did Toyota invest in US? Real wage rates only slightly lower in Japan Wage differentials no longer a big issue Import restrictions on cars built outside the U.S. No restrictions on U.S. assembled cars Honda 3 years ahead of Toyota with Ohio plant Mazda Subaru Honda Mitsubishi Toyota Nissan

8. Production of Motor Vehicles Saltillo, Mexico Silao, Mexico Dodge Journey Chevrolet Silverado Oshawa, Canada Georgetown, KY Chevrolet Impala Lexus ES 350 Flat Rock, MI Mazda MX-6 Marysville, OH Honda Accord Belvedere, IL Dodge Dart Georgetown, KY Toyota Camry Chattanooga, TN Oshawa,Canada Volkswagen Passat Chevrolet Camaro Are you certain your american auto is american Or your foreign auto is foreign?

9. (U.S.) Production Possibilities Curve Wheat Electronics goods

10. (U.S.) Production Possibilities Curve Wheat Electronics goods

11. (U.S.) Production Possibilities Curve Wheat PPC Electronics goods

12. (U.S.) Production Possibilities Curve Wheat Point of Tangency Indifference curve PPC Electronics goods

13. (U.S.) Production Possibilities Curve Wheat Point of Tangency Indifference curve Prevailing PPC Relative Prices without trade Electronics goods

14. Wheat PPC Relative Prices without trade Electronics goods U.S. reaches higher indifference curve by trading wheat for electronics

15. Wheat PPC Relative Prices without trade Electronics goods U.S. reaches higher indifference curve by trading wheat for electronics

16. Wheat New Point of Tangency with trade PPC Relative Prices without trade Electronics goods U.S. reaches higher indifference curve by trading wheat for electronics

17. Wheat New Point of Tangency with trade PPC Electronics goods U.S. reaches higher indifference curve by trading wheat for electronics

18. Wheat Production Consumption with trade PPC without trade Electronics goods

19. Wheat Production Consumption US US Produc- Produc- Produc- Produc- with trade tion tion PPC without trade Electronics goods

20. Wheat Production Consumption US Produc- with trade U.S. U.S. tion Consumption Consumption PPC without trade PPC Electronics goods

21. Wheat Production Sell Consumption Wheat US Produc- with trade tion PPC without trade Electronics goods Buy Electronics

22. International trade will make both countries better off if the relative prices for the two commodies does not correspond with the slope of the production possibility curve at the point of tangency with the corresponding indifference curve.

23. SALE U.S. Balance of Trade Cheap wheat but Americans demand foreign cars & CD players Value of currency ultimately determined by the value of goods produced by a country in world markets Cheap wheat--no one wants $ to buy U.S. wheat European currency valuable to us because Europe produces goods we like German Mercedes & BMW

24. AFRICA Currency of third world nation not valuable because economy does not produce what we want Low-value currency relative to U.S. dollars U.S. dollars always in demand by residents of third-world countries Russians get U.S. dollars by selling oil, gold, platinum nonrenewable natural resources What would you purchase with currency from Mali?

25. Trade balances self regulating with free exchange rates If $ overvalued, imports rise, exports decrease If $ undervalued, exports rise, imports decrease (high-priced Japanese imports) Self-equilibrating adjustments

26. Tariff A tax on imported items to make them more expensive to consumers Justification: protect domestic industry, but... Protects domestic industry by taxing U.S. consumers What's good for US industry may not be good for consumers If some other country can produce an item cheaper, why worry about where it is produced?

27. Import quota Limits quantity of a good that can be imported Effect similar to a tariff Domestic producers raise prices Consumer is the loser Foreign producers raise prices under quota Allows auto dealers to pad prices of foreign-made autos Additional dealer profit, or Adjusted market value This is a consequence of the quota on Japanese autos

28. Economic Impact of a Quota Price S Po D Qd/u.t. Qo

29. Sn Price So Pn Po D Qd/unit of time Qn Qo

30. Economic Impact of a Tariff Price So Po D Qo Qd/u.t.

31. St Price So P (domestic) Po (world) P D Qo Qt Qd/u.t.

32. Arguments for Protection Infant industry Protect jobs National security Domestic Unfair competition from Automobiles cheap foreign labor only are Available in the U.S.

33. GATT General Agreement on Tariffs & Trade 80 + nations 85 % of world trade Where trade negotiations take place Rules established for the conduct of trade Rules and regulations agreed upon by member nations

34. U.S. Ag Exports, Value, 1970, 1980, 1986

35. US Agricultural Exports, 2000-2012

36. Leading U.S. Ag. Exports as a Percent ofTotal Production, 1985

37. Exports as a Share of Total US Ag. Production, Average, 2008-2010