I. Introduction
A. Objectives
1. Describe the patterns and trends in international trade.
2. Explain comparative advantage
3. Explain why all countries can gain from international trade.
4. Explain how prices adjust to bring about balanced trade
5. Explain how economies of scale and diversity of taste lead to gains from international trade.
6. Explain why trade restrictions lower the volume of imports and exports and lower the possibilities for consumption.
7. Explain why we have trade restrictions even though they lower our consumption possibilities.
B. Topics to be covered
1. Patterns and trends in international trade
2. Opportunity cost and comparative advantage
3. The gains from trade
4. Trade restrictionsI. Patterns and Trends in International Trade
A. Imports are the goods and services a nation buys that are produced abroad.
B. The balance of trade is the value of exports minus the value of imports.
1. If this is positive, the country is a net exporter and
2. if the balance of trade is negative, the country is a net importer.
B. About 80 percent of U.S. international trade is in goods and 20 percent is in services.
1. The U.S. is:
a. a net importer of manufactured goods and industrial supplies and
b. a net exporter of agricultural products.
C. The U.S. trades with almost all parts of the world except for Eastern Europe,
1. where trade is almost nonexistent.
D. Imports and exports have become an increasingly large fraction of U.S. GDP, growing from
1. about five percent of GDP in 1950, to
2. about 10 percent of GDP in recent years.
E. The US balance of trade usually fluctuates near zero.
1. Since 1982, however, there has been a large excess of imports over exports,
a. that is, a negative balance of trade.
2. A negative balance of trade implies that:
a. the U.S. has been borrowing from abroad.
III. Opportunity Cost and Comparative Advantage
A. The opportunity cost of a product in terms of another good is given by:
1. the slope of the production possibility frontier.
B. A country has a comparative advantage in producing a good if
1. "it can produce that good at a lower opportunity cost than any other country can."
C. Countries engaged in international trade gain when:
1. they can buy goods at a lower opportunity cost abroad than it costs them to produce the good domestically.
2. Countries tend to specialize in producing goods for which they have a comparative advantage.
3. By producing according to comparative advantage and engaging in trade,
a. countries can consume combinations of goods that lie beyond their production possibility frontier.
b. This demonstrates that all countries gain from international trade.
D. A country has an absolute advantage when:
1. it has greater productivity in producing all goods than its trading partner.
2. Absolute advantage, however, does not determine the pattern of trade;
a. comparative advantage does.
III. The Gains from Trade
A. Countries often trade similar goods;
1. that is, automobiles are both exported from the United States and imported into the United States.
B. This occurs for two reasons:
1. People have wide ranging tastes.
a. Thus there may be a large number of apparently identical goods that people consider different, such as:
i. compact cars versus
ii. performance cars.
b. In this case, countries actually are not importing and exporting the same good.
2. Economies of scale
a.(when the average cost of production is lower, the higher the level of production)
b. This may cause trade in similar products.
c. In this case producers in different countries use the export market in order to sell enough output to take advantage of economies of scale.
B. Changes in comparative advantage lead to changes in international trade.
1. While the overall economy gains from trade,
2. it inflicts costs on some people within the nation.
3. This fact can lead to protectionism, where the government restricts foreign trade to protect domestic producers.
IV. Trade Restrictions
A. Tariffs and nontariff barriers are two modes of protectionism.
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A. A tariff is a tax imposed on an imported product.
1. Since 1930 US tariffs have tended to decrease.
2. The General Agreement on Tariffs and Trade (GATT) is an international treaty designed to:
a. limit tariffs and
b. promote free trade.
B. A tariff shifts the supply curve for the product to the left as foreigners must pay an additional tax.
C. This shift has several results:
1. It raises the price domestic consumers must pay for the good and
a. reduces the quantity purchased.
b. Consumers are harmed by the tariff.
2. Domestic producers receive a higher price and
a. produce more of the product.
b. The tariff benefits domestic producers of the product.
3. The government receives revenue from the tariff;
a. thus it, too, benefits.
4. The tariff harms the country's export industries since
a. foreigners can afford to purchase less of these products because
b. they are selling less to the domestic country.
5. Overall, a tariff reduces the gains from international trade.
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A. Nontariff barriers are any actions other than tariffs that restrict international trade.
1. Quotas and voluntary export restraints are the two most prevalent nontariff barriers.
a. A quota is a quantitative restriction on the amount of a product that may be imported;
b. a voluntary export restraint or VER is an agreement between governments where:
i. the government of the exporting country agrees to limit the amount of its exports.
2. Quotas and VERs both restrict the supply of imported goods.
a. This limit shifts the supply curve of the product to the left, resulting in
i. a higher equilibrium price,
ii. higher level of domestic production, and
iii. lower equilibrium quantity consumed.
3. While quotas and tariffs save jobs in the import- competing industries,
a. the cost in terms of higher domestic prices exceeds the wage per job saved.
4. With quotas and VERs the importers get the profit between:
a. the (relatively high) domestic price and
b. the (relatively low) foreign price.
5. With a tariff the domestic government collects this difference as revenue.
a. That the government collects no revenue from a quota or VER is a drawback of nontariff barriers.
b. There are potential advantages to nontariff barriers:
i. The government may use a quota to reward its political supporters the right to import the product;
ii. quotas determine exactly the quantity of imports whereas the quantity can vary if a tariff is used; and
iii. in the United States the administration can impose or change nontariff barriers whereas Congress controls tariffs.
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A. Dumping occurs when a good is sold in a foreign market:
1. for a price below the domestic price or
2. lower than its cost of production.
3. Under GATT and US law,
a. dumping is illegal and
b. antidumping tariffs can be imposed.
B. Countervailing duties are tariffs imposed to enable domestic producers to compete with subsidized foreign producers.
C. Free trade benefits some people and costs others.
1. The total benefits exceed the total costs but
2. the gain per person is small compared to the cost per person.
3. This difference in benefits and costs per person means that the group harmed by free trade finds it more profitable per person to lobby for barriers to trade.
4. In theory it is possible for:
a. the winners from free trade to compensate the losers so that
b. everyone is made better off, but
5. in practice, such compensation is rarely paid.
6. The political outcome that results is one where some restrictions on trade are imposed.
V. Summary of the lecture
Key concepts
1. Balance of trade
2. Comparative advantage
3. Countervailing duties
4. Dumping
5. Ex[ports
7. General Agreement on Tariffs and Trade
8. Imports
9. Net exporter
10. Net importer
11. Nontarriff barrier
12. Protectionism
13. Quota
14. Tariff
15. Voluntary export restraint
Review Questions
1. Why does international trade brings gains to all countries?
2. Why do all countries have a comparative advantage in something?
3. Why do many countries import items which are similar to the items they export?
4. What are the economic effects of a tariff?
5. What are the economic effects of a quota?
6. What are the economic effects of a voluntary export restraint?
7. Why do countries restrict international trade?