chiang 3e lect ppt ch 26 econ ch 16 micro ch 15 macro
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CHAPTER 15 (26):
INTERNATIONAL TRADE
COREECONOMICS, 3RD EDITION BY ERIC CHIANG
Slides by Debbie Evercloud
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TatianaNikolaevna
Kalashnikova/Getty
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LEARNING OBJECTIVES
At the end of this chapter, the student will
be able to:
Describe the benefits of free trade
Distinguish between absolute and
comparative advantage
Describe the economic impacts of trade
Define the terms of trade
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LEARNING OBJECTIVES
At the end of this chapter, the student will
be able to:
List the ways in which trade is restricted
Discuss the various arguments against free
trade
Debate the issues surrounding increasing
global economic integration
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EXAMPLE: IMPORTS AND
EXPORTS Take a quick look at your closet, and count
how many countries contributed to your
wardrobeshirts tailored in Hong Kong,
shoes made in Italy, sweaters made inNorway, jackets made in China, and so on.
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EXAMPLE: IMPORTS AND
EXPORTS What do American firms export to the rest
of the world?
Goods: commercial airplanes, cars and
trucks, tractors, high-tech machinery,
pharmaceuticals, agricultural goods, and raw
materials, such as soybeans and copper
Services: medical services, tourist services,higher education, and entertainment,
including movies, software, and music
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BY THE NUMBERS: CHINA
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GAINS FROM TRADE
A country that does not trade at all is
called an autarky.
Those countries that trade the least are
called closed economies.
Most countries are open economies that
willingly and actively engage in trade with
other nations.
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GAINS FROM TRADE
Trade consists of imports, goods and
services purchased from other countries,
and exports, goods and services sold
abroad.
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VOLUNTARY TRADE
Many people assume that trade between
nations is a zero sum game: a game in
which, for one party to gain, the other
party must lose.
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But voluntary exchange is in fact a
positive sum game, meaning that bothparties to a transaction can gain.
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ABSOLUTE AND COMPARATIVEADVANTAGE
An absolute advantage exists when onecountry can produce more of a good thananother country.
One country enjoys a comparativeadvantage in producing a particular goodif it can do so at the lowest opportunitycost.
If each country specializes according to itscomparative advantage, both nations can bemade better off through trade.
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COMPARATIVE ADVANTAGE
Both countries can be made better off by
specializing according to their comparative
advantage.
Canada will produce beef.
The United States will produce some beef and
some guitars.
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PRACTICAL CONSTRAINTS ON
TRADE Some practical constraints on trade:
Every transaction involves costs, includingtransportation, communications, and thegeneral costs of doing business.
Over the last several decades, however,transportation and communication costshave declined.
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EFFECTS OF VOLUNTARY
TRADE Although it is true that trading partners will
benefit from trade, some individuals and
groups within each country may lose.
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CHECKPOINT: THE GAINS FROM
TRADE
A comparative advantage exists when one
country can produce a good at a lower
opportunity cost than another country.
Both countries gain from trade when each
specializes in producing goods in which
they have a comparative advantage.
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THE TERMS OF TRADE
When countries trade many commodities,
the terms of trade are defined as the
average price of exports divided by the
average price of imports.
As a country devotes more resources to
producing one particular item, it will encounter
increasing opportunity costs.As each product settles into an equilibrium
price, the terms of trade are established.
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WINNERS AND LOSERS
IN FREE TRADE
With free trade, some sectors of the
economy win and others lose.
American consumers have been happy to
purchase Korean televisions, such asSamsung and LG.
American television manufacturers have not
been so pleased. These firms have had toadapt to overseas competition.
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WINNERS AND LOSERS
IN FREE TRADE
As textile production has been relocated tolow-wage countries, American consumershave enjoyed a substantial drop in theprice of clothing.
Still, being able to purchase inexpensiveimported clothes is small consolation for
the unemployed textile workers in NorthCarolina.
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TARIFFS
Tariffs are often ad valorem taxes.
This means the product is taxed by a certain
percentage of its price as it crosses the
border.
Other tariffs are unit taxes, in which a fixed
tax per unit of the product is assessed at
the border.
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EFFECT OF A UNIT TARIFF
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Quantity in thousands
Pricein$
2 4
S
D
400
600
500
With a tariff, domestic
consumers pay more than
otherwise. Some of this added
expense is collected by domestic
producers. The shaded arearepresents the amount of
government revenue
collected.
3
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QUOTAS
Under a quota system, the governmentlimits imports to a specified quantity.
No revenue is collected for the government,
but prices are higher because of the restrictedquantity.
This translates into more profit for themanufacturer.
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EFFECT OF A QUOTA
2013 Worth PublishersCoreEconomics Chiang and Stone
Quantity in thousands
Pricein$
2 4
S
D
400
600
500
A quota is a restriction
on the quantity of imports.
The domestic price will rise to
the market-clearing level,
but no revenue is collectedfor the government.
Quota
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ISSUE: FOREIGN TRADE ZONES
A foreign trade zone is a designated area
in a country in which foreign companies
can import inputs, without tariffs, to be
used for product assembly by localworkers.
The workers are often paid a fraction of
what equivalent workers would be paid inthe companys home country.
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ISSUE: FOREIGN TRADE ZONES
What may be surprising, however, is that
foreign trade zones are not limited to
developing countries with low labor costs.
The United States has many foreign trade
zones established for the same purpose:
to attract foreign companies to invest in
manufacturing plants.
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CHECKPOINT: TERMS OF
TRADE The terms of trade are determined by the
ratio of the price of exported goods to the
price of imported goods.
Tariffs are taxes on imports that protect
domestic producers and generate revenue
for the government.
Quotas restrict the volume of particular
imports that can come into a country.
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ARGUMENTS AGAINSTFREE TRADE
Antifree trade arguments fall into twocamps:
Traditional economic arguments Globalization concerns
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TRADITIONAL ECONOMIC
ARGUMENTS
The Infant Industry Argument
An infant industry is one so underdeveloped
as to not be able to survive in the global
environment. Unless the industrys government provides it
with some protection through tariffs, quotas,
or subsidies, it might not survive in the face of
foreign competition.
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TRADITIONAL ECONOMIC
ARGUMENTS
Drawbacks of the Infant Industry
Argument:
Second, infant industry protection tends to
focus on capital manufacturing.
Third, many industries seem to be able to
develop without protections, so countries may
be wasting their resources and reducing theirincomes by imposing protection measures.
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TRADITIONAL ECONOMIC
ARGUMENTS
Antidumping Argument:
Dumping means that goods are sold at lower
prices (perhaps below cost) abroad than in their
home market. This often is a result ofgovernment subsidies.
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TRADITIONAL ECONOMIC
ARGUMENTS
Low Foreign Wages:
Some advocates of trade barriers maintain
that domestic firms and workers need to be
protected from cheap foreign labor.
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On balance, however, the benefits of lower-
priced goods considerably exceed the costs
of lost employment.
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TRADITIONAL ECONOMIC
ARGUMENTS
National Defense:
In times of national crisis, the United States
must rely on key domestic industries, such as
oil, steel, and the defense industry. Some argue that these industries may require
protection even during peacetime to ensure
that they are already well established if a
crisis prevents importing key products.
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GLOBALIZATION CONCERNS
Trade and the Environment:
Concerns that expanded trade will lead toincreased environmental degradation as
companies take advantage of laxenvironmental laws in the developing world
Fears that environmental laws will be viewedas disguised protectionism
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GLOBALIZATION CONCERNS
Trade and the Environment:
As professors Bhagwati and Hudec argue,there has been no systematic race to the
bottom. Many corporations often have the highestenvironmental and labor standards in thedeveloping world.
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GLOBALIZATION CONCERNS
Working Conditions in DevelopingNations:
Some anti-globalization activists argue that
trade with developing countries simplyexploits workers where wages are low.
But it is not clear that workers would behelped if the United States were to cut off its
trade with low-wage countries.
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CHECKPOINT:ARGUMENTS AGAINST FREE TRADE
The infant industries argument claims that
some industries need protection to survive
in a global competitive environment.
Dumping involves selling products at lower
prices in foreign markets, often with the
help of subsidies from the government.
Some argue that domestic workers needprotection from low wages overseas.
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CHECKPOINT:ARGUMENTS AGAINST FREE TRADE
Globalization has meant that some U.S.
workers have lost jobs to foreign
competition.
The overall effect of international trade has
been to increase overall employment.
Concern about the environment is often a
factor in trade negotiations.
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CHAPTER SUMMARY
Voluntary exchange is a positive sum game,
meaning that both parties to a transaction can
benefit.
International trade is based on the principle ofcomparative advantage.
The terms of trade are defined as the average
price of exports divided by the average price of
imports.
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CHAPTER SUMMARY
The most common forms of trade restrictions are
tariffs and quotas.
The traditional economic arguments against free
trade include the following: Infant industries
Antidumping
Key industries
Environmental degradation
Protection against cheap labor
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DISCUSSION QUESTIONS
Take a look at the items in your backpack.
How many of them were made in other
countries? What about the backpack itself?
Explain the way in which a country canbenefit from trading with other countries that
are less productive overall.
Does an increase in international tradethreaten the national security of the United
States?