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International Trade Policy

Laugher Curve. A Harvard economist died and went to heaven ? No, that's not the joke.There were thousands of people ahead of him in line to see St. Peter.. Laugher Curve. To his surprise, St. Peter left his desk at the gate and came down the long line to where the economist was, and greeted him

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International Trade Policy

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    1. International Trade Policy Chapter 17

    2. Laugher Curve A Harvard economist died and went to heaven No, thats not the joke. There were thousands of people ahead of him in line to see St. Peter.

    3. Laugher Curve To his surprise, St. Peter left his desk at the gate and came down the long line to where the economist was, and greeted him warmly.

    4. Laugher Curve The economist said, I like all this attention, but what makes ME so special?

    5. Patterns of Trade Most economists oppose trade restrictions.

    6. Increasing but Fluctuating World Trade Sometimes international trade has grown rapidly other times it has grown slowly. It was about $500 billion in todays dollars in 1928 60% of U.S. GDP. In 1935 the ratio was 30% in 1950 it was 20% It is about $8 trillion today 65% of U.S. GDP.

    7. Increasing but Fluctuating World Trade Fluctuations in world trade result in part from fluctuations in world output.

    8. Differences in the Importance of Trade The importance of international trade to countries economies differs widely. For most nations, imports and exports roughly correspond.

    9. Differences in the Importance of Trade

    10. What and With Whom the U.S. Trades The majority of U.S. exports and imports involve manufactured goods. The primary trading partners of the U.S. are Canada, Mexico, the European Union, and Pacific Rim countries. U.S. imports have exceeded exports in recent years.

    11. What and With Whom the U.S. Trades The U.S. balance of trade shows a trade deficit rather than a trade surplus.

    12. What and With Whom the U.S. Trades Trade deficit an excess of imports over exports.

    13. U.S. Exports by Region, 2001

    14. U.S. Imports by Region, 2001

    15. Debtor and Creditor Nations Following World War II, the U.S. ran trade surpluses. In recent years, the U.S. has run a significant trade deficit.

    16. The Principle of Comparative Advantage The principle of comparative advantage states that as long as the relative opportunity costs of producing goods differ among nations, there are potential gains from trade.

    17. The Gains From Trade Saudi Arabia has a comparative advantage in producing oil and the U.S. has a comparative advantage in producing food. The cost of producing one ton of food in Saudi Arabia is 10 barrels of oil. The cost of producing one ton of food in the U.S. is 1/10 of a barrel of oil.

    18. The Gains From Trade Saudi Arabia is producing 400 barrels of oil and 60 tons of food.

    19. The Gains From Trade The following tables demonstrate how output increases when two nations specialize in the activity for which each has a comparative advantage.

    20. The Gains From Trade

    21. The Gains From Trade

    22. The Gains From Trade

    23. The Gains From Trade

    24. Dividing up the Gains From Trade The more competition, the less the trader gets. Smaller nations get a larger proportion of the gain than larger nations. Nations producing goods with economies of scale get a larger gain from trade.

    25. Varieties of Trade Restrictions Trade restrictions include: Tariffs and quotas. Voluntary restraint agreements. Embargoes. Regulatory trade restrictions. Nationalistic appeals.

    26. Tariffs Tariffs (custom duties) are taxes governments place on internationally traded goods. Tariffs make imported goods relatively more expensive encouraging the consumption of domestically produced goods.

    27. Tariffs The Smoot-Hawley Act of 1930 was a disaster that raised tariffs on imports to 60 percent.

    28. Tariffs The dismal failure of Smoot-Hawley was the main reason the GATT was established in 1947.

    29. Tariffs GATT was replaced by the World Trade Organization in 1995.

    30. Quotas Quotas are quantity limits placed on imports. Both tariffs and quotas increase price and reduce quantity.

    31. Quotas Under a tariff, the government collects the tariff revenue.

    32. A Tariff and a Quota

    33. Foreign Supply of a Good When the Domestic Country is Small

    34. Foreign Supply of a Good When the Domestic Country is Small

    35. Voluntary Trade Agreements Voluntary trade agreements are agreements to limit exports. Voluntary trade agreements are often not all that voluntary.

    36. Voluntary Trade Agreements The effect of such voluntary restraint agreements is identical to the effect of quotas.

    37. Embargoes An embargo is an all-out restriction on import or export of a good. Embargoes are usually established for international political reasons rather than for economic reasons.

    38. Regulatory Trade Restrictions Regulatory trade restrictions are government-imposed procedural rules that limit imports. Some regulatory restrictions are legitimate. Others are designed simply to make importing more difficult.

    39. Nationalistic Appeals Nationalistic appeals are also ways to limit trade. The Buy American campaign is an example.

    40. Reasons for Trade Restrictions Unequal internal distribution of the gains from trade. Haggling by companies over the gains from trade. Haggling by countries over trade restrictions.

    41. Reasons for Trade Restrictions Specializing production: learning by doing and economies of scale.

    42. Unequal Internal Distribution of the Gains From Trade People dont like losing their jobs because foreign goods are cheaper so they lobby to prevent foreign competition. Setting up tariffs or quotas in order to save domestic jobs costs the economy money.

    43. Unequal Internal Distribution of the Gains From Trade Benefits of trade are generally widely scattered among the entire population.

    44. Unequal Internal Distribution of the Gains From Trade Trade adjustment assistance programs have been instituted because eliminating trade restrictions often make some people worse off.

    45. Haggling by Companies Over the Gains From Trade Trade can be restricted when companies haggle over the gains of trade. Strategic bargaining demanding a larger share of the gains from trade than you can reasonably expect.

    46. Haggling by Companies Over the Gains From Trade If strategic bargaining is successful, you get the most from the bargain, but you risks having the deal fall through.

    47. Haggling by Countries Over Trade Restrictions Trade restrictions and the threat of trade restrictions play an important role in strategic bargaining. The smaller a countrys gains from trade, the stronger its bargaining position.

    48. Specialized Production It is often not at all clear why particular nations have a productive advantage in certain goods. These nations may learning by doing and economies of scale may exist.

    49. Learning by Doing Learning by doing means becoming better at a task the more often you perform it. When there is learning by doing, it is much harder to assign comparative advantage to a country.

    50. Economies of Scale If significant economies of scale exist, it makes sense for one country to specialize in one good while another specializes in another good. Economies of scale cost per unit of output falls as output increases.

    51. Economies of Scale A number of countries follow trade strategies to take advantage of economies of scale.

    52. Economies of Scale Countries use the infant industry argument to justify many trade restrictions.

    53. Macroeconomic Aspects of Trade When a nation is in a recession, there is a strong macroeconomic reason to limit imports and encourage exports. Pressure to impose trade restrictions increases substantially.

    54. National Security Limiting trade on grounds of national security takes two forms: Export restrictions on strategic materials and defense-related goods. Import restrictions on defense-related goods.

    55. International Politics U.S. trade restrictions on Cuba and on Iraq are politically motivated. The reasoning if trade helps you, refusing to trade with you hurts you.

    56. Increased Revenue Brought in by Tariffs In the 1800s, tariffs were the principal source of revenue for the U.S. government. They remain a primary source of revenue for developing nations.

    57. Why Economists Generally Oppose Trade Restrictions Economists generally oppose trade restrictions because: Free trade increases total output globally. International trade provides competition for domestic companies. Restrictions based on national security are often abused or evaded. Trade restrictions are addictive.

    58. Free Trade Increases Total Output From a global perspective, free trade increases total output. Trade restrictions can only benefit a nation if other countries dont retaliate. Retaliation is the rule, not the exception.

    59. International Trade Provides Competition International competition is desirable because it forces domestic firms to stay on their toes.

    60. International Trade Provides Competition In theory, the infant industry argument makes sense.

    61. Restrictions based on National Security Are Abused or Evaded The national security argument is often carried to ridiculous extremes. It is fairly easy to get around national security concern by transshipments of arms.

    62. Restrictions based on National Security Are Abused or Evaded Economists argue that by fostering international cooperation, international trade makes war less likely.

    63. Trade Restrictions are Addictive Trade restrictions are addictive the more you have, the more you want. Some trade restrictions may benefit a nation, but almost no nation can limit its restrictions to the beneficial ones.

    64. Institutions Supporting Free Trade Free trade associations groups of nations that allow free trade among its members. As a group, they put up common barriers against all other nations goods.

    65. Free Trade Associations The most famous free trade association is the European Union (EU). In 1993, the U.S., Canada, and Mexico formed the North American Free Trade Association (NAFTA).

    66. Free Trade Associations Countries use most-favored-nation status to strengthen trading relationships among themselves.

    67. International Trade Policy End of Chapter 17

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