Chapter 35

Chapter 35

Chapter 26 International Trade Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Some Key Trade Facts U.S. trade deficit in goods $529 billion in 2015 U.S. trade surplus in services $220 billion in 2015 Canada largest U.S. trade partner Trade deficit with China $366 billion in 2015 Exports are 13% U.S. output Dependence on oil LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-2 Some Key Trade Facts Continued Principal U.S. exports include:

Chemicals Agricultural products Consumer durables Semiconductors Aircraft U.S. provides about 8.5% of worlds exports LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-3 Some Key Trade Facts Concluded Principal U.S. imports include: Petroleum Automobiles Metals Household appliances Computers LO1

Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-4 Shares of World Exports LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-5 Shares of Key World Exports Some Trade Facts Continued LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

26-6 Economic Basis for Trade Nations have different resource endowments Labor-intensive goods Land-intensive goods Capital-intensive goods LO2 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-7 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 LO2 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-8 Production Possibilities 45 45 40 40 35 35 Vegetables (Tons) Vegetables (Tons) (b) Mexico

(a) United States 30 30 25 25 20 20 15 15 12 10 A 10

5 0 LO2 5 4 5 10 15 18 20 Beef (Tons) 25 30 0 Z 5

8 10 15 20 Beef (Tons) Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-9 Comparative Advantage Continued 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 LO2 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

26-10 International Comparative Advantage Specialization LO2 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-11 Terms of Trade U.S. 1V = 1B U.S. will sell 1B for more than 1V Mexico 2V = 1B Mexico will pay less than 2V for 1B Settle between the two Depends on supply/demand factors Assume 1B = 1.5V LO2 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-12

Gains from Trade Trading possibilities line Slope equals terms of trade Improved options Complete specialization More of both goods More efficient resource allocation LO2 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-13 Gains from Trade Continued (a) United States 45 45 V 40

40 Trading Possibilities Line 30 V 25 20 A 15 12 A 10 35 Vegetables (Tons)

Vegetables (Tons) 35 30 25 20 LO2 Trading Possibilities Line v 15 10 Z 5 0 (b) Mexico

B 5 10 15 18 20 Beef (Tons) 25 30 W 5 4 0 Z 5 b 8 10

b 15 Beef (Tons) 20 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-14 Comparative Advantage Concluded Trade with increasing costs Concave production curve Resources not perfectly substitutable Incomplete specialization Case for free trade Promote efficiency Promote competition LO2 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

26-15 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 LO3 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-16 Supply and Demand Analysis Continued (b) U.S. Export Supply and Import Demand Surplus = 100

Sd 1.50 1.50 Surplus = 50 1.25 1.00 .75 Shortage = 50 .50 50 75 100

125 Quantity of Aluminum (Millions of Pounds) b U.S. Export Supply a .75 x U.S. Import Demand .50 y

Dd Shortage = 100 LO3 c 1.25 1.00 0 Price (Per Pound; U.S. Dollars Price (Per Pound; U.S. Dollars (a) U.S. Domestic Aluminum Market 150

0 50 100 Quantity of Aluminum (Millions of Pounds) Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-17 Supply and Demand Analysis Concluded (b) Canadas Export Supply and Import Demand 1.50 1.50 Surplus = 100

Sd 1.25 1.25 Surplus = 50 .75 .50 Shortage = 50 50 75 100 Dd 125 Quantity of Aluminum (Millions of Pounds)

LO3 s 1.00 1.00 0 Price (Per Pound; U.S. Dollars Price (Per Pound; U.S. Dollars (a) Canadas Domestic Aluminum Market 150 .75 r q

.50 t 0 Canadian Export Supply 50 Canadian Import Demand 100 Quantity of Aluminum (Millions of Pounds) Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-18 International Equilibrium

Price (Per Pound; U.S. Dollars Import demand = Export supply U.S. Export Supply 1.00 .88 .75 e Canadian Export Supply Equilibrium U.S. Import Demand Canadian Import Demand

0 50 100 Quantity of Aluminum (Millions of Pounds) LO3 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-19 Trade Barriers and Export Subsidies Tariffs Revenue tariff Protective tariff Import quota Nontariff barrier (NTB) Voluntary export restriction (VER) Export subsidy LO4 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

26-20 Economic Impact of Tariffs Direct effects Decline in consumption Increase in domestic production Decline in imports Tariff revenue Indirect effects LO4 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-21 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

LO4 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-22 Economic Effects of a Tariff or Quota Sd Price Sd + Q Pd Pt Pw Dd 0 LO4 a

b q c d Quantity Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-23 The Case for Protection Military self-sufficiency Diversification for stability Infant industry Protection against dumping Increased domestic employment Cheap foreign labor LO5 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-24 Multilateral Trade Agreements General Agreement on Tariffs and Trade

(GATT) World Trade Organization (WTO) European Union (EU) North American Free Trade Agreement (NAFTA) LO6 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-25 GATT Three principles: Equal, nondiscriminatory trade between member nations Reduction in tariffs Elimination of import quotas LO6 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-26

WTO Established by Uruguay Round of GATT 161 member nations in 2015 Oversees trade agreements and rules on disputes Critics argue that it may allow nations to circumvent environmental and workerprotection laws LO6 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-27 European Union Initiated in 1958 as Common Market Abolished tariffs and import quotas between member nations Established common tariff with nations outside the EU Created Euro Zone with one currency LO6

Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-28 NAFTA Agreement between U.S., Canada, and Mexico Established a free trade zone between the countries Trade has increased in all countries Enhanced standard of living LO6 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-29 Helping Those Hurt by Free Trade 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 LO6 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26-30 Petition of the Candlemakers Petition of candlemakers asking for protection from natural light producers such as the sun Tongue-in-cheek argument supporting the idea of free trade 26-31 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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