Chapter 14: International trade: does it jeopardize american jobs?

Chapter 14INTERNATIONAL TRADE:DOES IT JEOPARDIZE AMERICAN JOBS?Chapter OutlineWHAT WE TRADE AND WITH WHOMTHE BENEFITS FROM TRADEBARRIERS TO TRADETRADE AS A DIPLOMATIC WEAPONWhat We Trade:Exports (2000)GoodBillions of Dollars of ExportsChemicals80.3Food and AgriculturalProducts54.2Computers196.2Airplanes and Parts53.5Motor Vehicles79.7Services293.5Total1,065.7What We Trade:Imports (2000)GoodBillions of Dollars of ImportsComputers and Semiconductors164.9Petroleum25.5Chemicals71.9Audio and Video Equipment.29.0Motor Vehicles179.7Services217.0Total1,441.4With Whom We TradeCountryExports in billionsImports in billionsBalanceCanada178.8229.2-50.4Mexico111.7135.9-24.2Japan65.2146.7-81.5China16.3100.1-83.8Mid East19.038.9-19.9Other Asia119.0199.0-80.0W. Europe181.3277.3-96.0Africa11.027.6-17.6World782.41216.7-434.3Comparative and Absolute AdvantageAbsolute Advantage: the ability to produce a good better, faster, or more quickly than a competitorComparative Advantage: the ability to produce a good at a lower opportunity cost of the resources usedThe Benefits of Trade:When Comparative and Absolute Advantage are the same BeerSausageGermany 21Italy12Suppose there are two countries, Germany and Italy, and two goods, beer and sausage, and the production per unit of labor is shown in the table below.Clearly, there are benefits from trade. If the Germans focus on beer production and the Italians focus on sausage production and they trade with one another more beer and more sausage is available to both countries.The Benefits of Trade:When Comparative and Absolute Advantage are Not the same BeerSausageGermany 23Italy12Now suppose the Germans are better at producing both goods. The Germans have an absolute advantage in both but a comparative advantage in only beer. There are still benefits from trade. If the Germans focus on beer production and the Italians focus on sausage production and they trade with one another more beer and more sausage is available to both countries. Terms-of-tradeThe amount of a good one country must give up in order to obtain another good from the other country, usually expressed as a ratio.Using Production Possibilities FrontiersBeerSausage BeerSausageItalyGermanyProduction Possibilities FrontierProduction Possibilities FrontierConsumption Possibilities Frontier with TradeBeerSausage Consumption Possibilities FrontierReasons For Limiting Trade That Many Economists SupportNational SecurityNational IdentityBoth of the above can be overstated easily.Environmental ConcernsChild-Labor ConcernsReasons for Limiting Trade that Most Economists Do Not SupportTo protect industries from competitionTo temporarily aid an industry that is just emerging.To protect an industry from competition that is dumping (the exporting of goods below cost so as to drive competitors out-of-business) its products in the US.Methods of Limiting TradeTariffs: a tax on importsQuotas: a legal restriction on the amount of a good coming into the countryNon-tariff barriers: barriers to trade that result from regulatory actionsTariffs vs. QuotasPlimitCABEPQ/tDSP*Q*QlimitLimiting trade with a quota S’}TariffFLimiting trade with a tariffA tariff raises tax revenue and a quota does not.Costs of ProtectionWhether there is a quota or a tariff there is deadweight loss. This means that the gainers (the people who keep their jobs) gain less than the losers (the people who have to pay higher prices) lose. The average cost per job saved via trade barriers is estimated to be $169,000 per year.Trade as a Diplomatic WeaponTrade sanctions have failedTo get Castro out of CubaTo get Iran to release our hostages in 1979-1980.To get the Soviet Union out of Afghanistan.To get Iraq out of Kuwait in 1990.