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Chapter 39 international trade Unit 7 pages 805 - 81.. - Coggle Diagram
Chapter 39 international trade Unit 7
pages 805 - 81..
Trade deficit in goods: $529 billion in 2015
Trade deficit with China: $366 billion in 2015
Imports exceeds values of exports
Trade surplus in services: $220 billion in 2015
Exports exceeds values of imports
Exports are 13% U.S. Output
Canada is largest US trade partner
Dependence on oil
Economic basis for trade
Specialisation
Nations have difference recourse endowments
Labour intensive goods
Products requiring relatively large amounts of labor to produce.
textiles, electronics, apparel, toys, sporting goods
Land-intensive goods
Products requiring relatively large amounts of land to produce.
Beef, wool, meat
Capital-intensive goods
Products that require relatively large amounts of capital to produce.
Aeroplanes, automobiles, agricultural equipment, machinery, cheminals
Comparative Advantage
•Assumptions
• Two nations
• Same size labor force
• Constant costs in each country
• Different costs between countries
• U.S. absolute advantage in both
•
Opportunity cost ratio
• Slope of the curve
• Vegetables sacrificed per ton of beef
comparative advantage
A situation in which a person or country can produce a specific product at a lower opportunity cost in terms of other types of output foregone than some other person or country; the basis for specialization and trade.
Production productivity curve USA
Production productivity curve Mexico
Gains from trade USA
Gaines from trade Mexico
Opportunity-cost ratio in Mexico
2V equivalent to 1B
Comparative Advantage
•Self-sufficiency output mix
•Specialization and trade
• Produce the good with the lowest domestic opportunity cost
•Opportunity cost of 1 ton of beef:
• 1 pound of vegetables in U.S.
• 2 pounds of vegetables in Mexico
International specialization
Gains from specialization = Output available after Trade - Output before specialization
Gains from Trade
•Trading possibilities line
•Slope equals terms of trade
• Improved options
•Complete specialization
• More of both goods
• More efficient resource allocation
Supply and Demand Analysis
• World price • Domestic price with no trade
•World price > domestic price • Export surplus • Export supply curve
•World price < domestic price • Import shortage • Import supply curve
trade
The voluntary exchange of goods, services, or assets between two or more parties.
gains from trade
The extra output that trading partners obtain through specialization of production and exchange of goods and services.
principle of comparative advantage
The proposition that an individual, region, or nation will benefit if it specializes in producing goods for which its own opportunity costs are lower than the opportunity costs of a trading partner, and then exchanging some of the products in which it specializes for other desired products produced by others.
Terms of trade
The rate at which units of one product can be exchanged for units of another product; the price of a good or service; the amount of one good or service that must be given up to obtain 1 unit of another good or service.
Opportunity-Cost ratio in the USA
1 Veg=1 Beef
1V three-dash()1B
()Equivalent to
absolute advantage
A situation in which a person or country can produce more of a particular product from a specific quantity of resource inputs than some other person or country.
In 1776, Adam Smith used the concept of absolute advantage to argue for international specialization and trade.
But several decades later, David Ricardo realized that what matters isn't a product's cost measured in terms of the amount of inputs needed to make it but, rather, in terms of alternative products foregone to make it.
forgone-consumption perspective
Trade Barriers and Export Subsidies
• Tariffs - is an excise tax on value tax or qty of imported goods
• Revenue tariff (fairly low)
• Protective tariff (high)
• Import quota (limit, drives price up by limiting supply)
• Nontariff barrier (NTB) (unreasonable limit on exports, extensive documentation, or restricting location)
•Voluntary export restriction (VER)
• Export subsidy (lower production costs to compete more efficient against imported goods)
Economic Impact of Tariffs
• Direct effects
• Decline in consumption
• Increase in domestic production
• Decline in imports
• Tariff revenue
Dumping:
The sale of a product in a foreign country at prices either below cost or below the prices commonly charged at home.
Smoot-Hawley Tariff Act:
Legislation passed in 1930 that established very high tariffs. Its objective was to reduce imports and stimulate the domestic economy, but it resulted only in retaliatory tariffs by other nations.
Indirect effects
foreign country supplying the import will sell less, their
economy will decline.
If they imported any products from the domestic country, those would decline
Tariffs also, to some extent, subsidize inefficient producers, which can be a drain on the economy.
Economic Impact of Quotas
• Decline in consumption
• Increase in domestic production
• Decline in imports
• Quotas do not provide for any government revenue but instead transfer it to foreign producers
The Case for Protection
• Military self-sufficiency • Diversification for stability • Infant industry • Protection against dumping • Increased domestic employment •Cheap foreign labor
Equilibrium world price:
World supply and demand
Equilibrium domestic price:
Domestic supply and demand
Canada's domestic market (supply and demand)
Canada's export supply and import demand
Canada and USA export supply / demand (Page 818)
World equilibrium price is where one county's export intercepts the other's import line
export supply curve
An upward sloping curve that shows the amount of a product that domestic firms will export at each world price that is above the domestic price.
import demand curve
A downward sloping curve showing the amount of a product that an economy will import at each world price below the domestic price.
Multilateral Trade Agreements
• General Agreement on Tariffs and Trade (GATT) • Legal agreement between 23 countries to reduce trade barriers and encourage cross-border trade. • World Trade Organization (WTO) • Intergovernmental organization that governs international trade. • European Union (EU) • Legal agreement between 28 European countries to reduce trade barriers and encourage cross-border trade within Europe. • North American Free Trade Agreement (NAFTA) • Canada, Mexico and the United States.
Offshoring and Trade Adjustment Assistance • Trade Adjustment Assistance Act • Designed to help individuals hurt by international trade • Offshoring of jobs • Shifting of work previously done by American workers to workers abroad
