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International Trade (Key Trade Facts or Trade Profile of a Country (A…

- - - - As national economies evolve, the size and quality of their labour forces may change, the volume and composition of their capital stock may shift, new technologies may develop an even the quality of land and the quantity of natural resources may be altered.
        As such changes take place, the relative efficiency with which a nation can produce specific goods will also change. As economists would say, comparative advantage can and does sometimes change
  - - - Specialization and international trade increase the productive of a country's resources and allow a country to obtain greater total output than otherwise would be possible. These benefits are the result of exploiting both absolute advantages and comparative advantages.
        
        A country is said to have an absolute advantage over other producers of a product if it is the most efficient producer of that product (by which we mean that it can produce more output of that product from any given amount of resource inputs that can any other producer).
        
        A country is said to have a comparative advantage over other producers of a product if it can produce the product at a lower opportunity cost (by which we mean that it must forgo less output of alternative products when allocating productive resources to producing the product in question.
  - - - Opportunity-Cost Ratio in the US
        
        In US the opportunity-cost ratio (domestic exchange ratio) for the two products is 1 ton of vegetables (V) for 1 ton of beef (B), or
        US: 1V=1B
      - Opportunity-Cost Ratio in Mexico
        
        In Mexico, 20 tons of vegetables must be given up to obtain 10 tons of beef. The slope of the production possibilities curve is 2 (=20 vegetables/10beef), This means that in Mexico the opportunity-cost ratio for the two goods is 2 tons of vegetables for 1 ton of beef, or
        Mexico: 2V = 1B
      - Note 3 realities relating to the above production possibilities curves:
        
        Constant Costs: The curves are drawn as straight lines, in contrast to the bowed-outward production possibilities frontiers we examined in Chap 1. This means we have replaced the law of increasing opportunity costs with the assumption of constant costs.
        
        Different Costs: The differing slopes of the two curves reflect the numbers in the figures and reveal that the opportunity costs of producing beef and vegetables differ between the two nations.
        
        US Absolute Advantage in both. A producer has an absolute advantage over another producer if it can produce more of product than the other producer using the same amount of resources.
        
        Self-Sufficiency Output Mix: If the US and Mexico are isolated and self-sufficient, then each country must choose some output mix on its production possibilities curve.
        Optimal Mix for US: Point A
        Optimal Mix for Mexico: Point Z
        
        International Specialization According to Comparative Advantage and the Gains from Trade:
        
        A producer has a comparative advantage in producing a particular product if it can produce that product at a lower opportunity cost than other producers. Comparative advantage is the key determinant in whether or not nations can gain from specialization and trade. In fact, absolute advantage turns our to be irrelevant.
        
        As a result, total output can increase if each country specializes in the production of the good in which it has the lower opportunity cost. This idea is summarized in the principle of comparative advantage, which says that total output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for producing that good.
        
        Economizing requires that any particular good be produced by the nation having the lowest domestic opportunity cost or the nation having the comparative advantage for that good.
        The table verifies that specialized production enables the world to obtain more output from its fixed amount of resources.
        As a result, the world ends up with 4 more tons of beef and 4 more tons of vegetables than it would if there were self-sufficiency and unspecialized productions.
  - - - The terms of trade determine whether each country can "get a better deal" by specializing and trading than it could if it opted instead for self sufficiency.
        Note that because 1B=1V in the US and similarly 1B=2V in Mexico the international exchange ratio or terms of trade must therefore lie somewhere between
        1B=1V (US's Cost Conditions)
        and
        1B=2V (Mexcico's Cost Conditions)
        
        The actual exchange ratio depends on world supply and demand for the two products. If overall demand for vegetables is weak relative to its supply and if the demand for beef is strong relative to its supply, the price of vegetables will be lower and the price of beef will be higher.
        In this manner, the actual exhange ratio that is set by world supply and demand determines how the gains from international specialization and trade are divided between the two nations.
  - - - Trading possibilities lines and the gains from trade: As a result of specialization ad trade, both the United States and Mexico can have higher leves of output than the levels attainable on their domestic production possibilities curve.
        a. The US can move from point A on its domestic possibilities curve to say A'
        b. Mexico can move from Z to Z'
        
        Improved Alternatives: Specialization and trade create a new exchange ratio between beef and vegetables, and that ratio is reflected in each nations tradiing possibilities line. For both nations, this exchange ratio is superior to the unspecialized exchange ratio embodied in their respective production possibilities curves.
        
        Greater Output: Specialization according to comparative advantage results in a more efficient allocation of world resources, and larger outputs of both products are therefore available to both nations.
        We know that a nation can expand its production possibilities boundary by:
        
        Expanding the quantity and improving the quality of its resources or
        
        Realizing technological progress
        
        We have now established that international trade can enable a nation to circumvent the output constraint illustrated by its production possibilities curve.
        An economy can grow by expanding international trade. The outcome of internal specialization and trade is equivalent to having more and better resources or discovering and implementing improved production techniques.
  - - - Side Benefit of Free Trade: It promotes competition and deters monopoly. The increased competition from foreign firms forces domestic firms to find and use the lowest-cost production techniques. It also compels them to be innovative with respect to both product quality and production methods, thereby contributing to economic growth.
        
        Side Benefit of Free Trade: It links national interests and breaks down national animosities. Confronted with political disagreements, trading partners tend to negotiate rather than make war.
- - - - We assume there are no trade barriers, such as tariffs and quotas, and not international transportation costs.
        
        Domestic supply Sd and demand Dd set the domestic equilibrium price of aluminium at $1 per pound. At world prices above $1, there are domestic surpluses of aluminium. At prices below $1, there are domestic shortages.
        
        Surpluses are exported (top curve), and shortages are met by importing aluminium (lower curve). The export supply curve shows the direct relationship between world prices and US exports; the import demand curve portrays the inverse relationship between world prices and US imports.
        
        Export Supply Curve slopes upward, indicating a direct or positive relationship between the world price and the amount of exports. As world prices increase relative to domestic prices exports will rise.
        
        Import Demand Curve is a downsloping curve that shows the negative or inverse relationship between world prices and imported amounts. It reveals that as world prices fall relative to domestic prices, imports increase.
        
        Supply & Demand in US
        
        Supply & Demand in Canada
        
        At world prices above the $0.75 domestic price, production in Canada exceeds domestic consumption. At world prices below $0.75, domestic shortages occur.
        
        Surpluses result in exports, and shortages result in imports. The Canadian export supply curve and import demand curve depict the relationship between world prices and exports or imports.
        
        Equilibrium World Price, Exports & Imports
        
        Equilibrium world price and quantity of exports and imports: In a two-nation world, the equilibrium world price (=$.88) is determined by the intersection of one nation's export supply curve and the other nation's import demand curve. This intersection also decides the equilibrium volume of exports and imports. Here Canada exports 25million pounds of aluminium to the US.
        
        1 more item...
        
        A nation will export a particular product if the world price exceeds the domestic price; it will import the product if the world price is less than the domestic price.
        
        In a two-country world model, equilibrium world prices and equilibrium quantities of exports and imports occur where one nation's export supply curve intersects the other nation's import demand curve.
- - - - Revenue Tariff: Usually applied to a product that is not being produced domestically
      - Protective Tariff: Is implemented to shield domestic producers from foreign competition. These tariffs impede free trade by increasing the prices of imported goods and therefore shifting sales toward domestic producers. Although protective tariffs are usually not high enough to stop the importation of foreign goods, they put foreign producers at a competitive disadvantage.
      - Import Quota: Is a limit on the quantities or total values of specific items that are imported in some period. Once that quota is filled further imports of that product is choked off. Import quotas are more effective than tariffs in impeding international trade. With a tariff, a product can go on being imported in large quantities but with an import quota all imports are prohibited once the quota is filled.
        
        Nontariff barrier (NTB): Include onerous licensing requirements, unreasonable standards pertaining to product quality, or simply bureaucratic hurdles and delays in customs procedures. By restricting the issuance of licenses, governments can limit imports.
        
        Voluntary Export Restriction (VER): Is a trade barrier by which foreign firms "voluntarily limit the amount of their exports to a particular country. VER's have the same effect as import quotas and are agreed to by exporters to avoid more stringent tariffs or quotas.
        
        Export Subsidy: Consists of a government payment to a domestic producer of export goods and is designed to aid that producer. By reducing production costs, the subsidies enable the domestic firm to charge a lower price and thus to sell more exports in world markets.
  - - - Decline in Consumption
      - Increased Domestic Production
      - Decline in Imports
      - Tariff Revenue
      - The economic effects of a protective tariff or an import quota: A tariff that increases the price of a good from Pw to Pt will reduce domestic consumption from d to c. Domestic producers will be able to sell more output (b rather than a) at a higher price (Pt rather than Pw). Foreign exporters are injured because they sell less output (bc rather than ad). The yellow area indicates the amount of tariff paid by domestic consumers. An import quota of bc units has the same effect as the tariff, with one exception. The amount represented by yellow are will go to foreign producers rather than to the domestic government.
        
        Indirect Effect:
        
        Tariffs directly promote the expansion of inefficient industries that do not have a comparative advantage; they also indirectly cause the contraction of relatively efficient industries that do have a comparative advantage. Tariffs cause resources to be shifted in the wrong direction.
        We know that specialization and world trade lead to more efficient use of world resources and greater world output. But protective tariffs reduce world trade. Therefore, tariffs also reduce efficiency and the world's real output.
  - - - As a consequence of the quota, the supply of smartphones is Sd+Q in the US. This supply consists of the domestic supply plus the fixed amount bc (=Q) that importers will provide at each domestic price. The supply curve Sd+Q does not extend below price Pw because Chinese producers would not export smartphones to the US at any price below Pw; instead they would sell them to other countries at the world market price of Pw.
        
        The higher price created by quotas results in additional revenue for foreign producers rather tha for the government with a tariff.
  - - - The higher the price of imports causes some consumers to shift their purchases to higher-priced domestically produced goods.
        
        The costs to consumers substantially exceed the gains to producers and governments. A sizable net cost or efficiency loss to society arises from trade protection.
        
        The result is economic inefficiency, reduced consumption, and lower standards of living.
      - The prices of domestically produced goods rise because import competition has declined
      - The price of the imported product goes up
- - - - Shortcomings of Argument: Import restrictions alter the composition of employment, but they may have little or no effect on the volume of employment.
        
        Nations adversely affected by tariffs and quotas are likely to retaliate, causing a "trade war" that will choke off trade and make all nations worse off. Finally forcing an excess of exports over imports cannot succeed in raising domestic employment over the long run. The long-run impact of tariffs is not an increase in domestic employment but, at best, a reallocation of workers away from export industries and to protected domestic industries. This shift implies a less efficient allocation of resources.
- - - - The European Union: Countries have also sought to reduce tariffs by creating regional free-trade zones e.g EU. The EU has abolished tariffs and import quotas o nearly all products traded among the participating nations and established a common system of tariffs applicable to all goods received from nations outside the EU. It has also liberalized the movement of capital and labour within the EU and has created common policies in other economic matters of joint concern, such as agriculture, transportation, and business practices.
        The free flow of goods and services has created large markets for EU industries. The resulting economies of large-scale production have enables these industries to achieve much lower costs than they could have achieved in their small, single-nation markets.
        
        The biggest accomplishement is the establishment of the eurozone....EURO. Economistss expect the adoption of the Euro to raise the standard o living in the eurzone nations over time. By ending the inconvenience and expense of exchanging currencies, the euro has enhanced the free flow of goods, services and resources among the eurozone members.
        The eurozone has also allowed consumers and businesses to comparison shop for outputs and inputs, and this capability has increased competition, reduced prices and lowered costs.
      - North American Free Trade Agreement: In 1993 Canada, Mexico and the US created a major free-trade zone. The North American Free Trade Agreement (NAFTA) established a free trade area that has about the same combined output as the EU but enconmpasses a much larger geographic area.
        Since the passage of NAFTA in 1993, employment in the US has increased by more than 25 million workers. NAFTA has increased trade among Canada, Mexico, and the US and has enhance the standard of living in all 3 countries.