Chapter 17: International Trade (2)

Chapter 17International TradeTrade BalancesImports: goods and services purchased from foreign sources.Exports: goods and services sold to foreign buyers.17-*Trade BalancesImports and exports are seldom equal.The trade balance is the difference between exports and imports:Trade balance = Exports – Imports17-*Trade BalancesTrade deficit: the amount by which the value of imports exceeds the value of exports in a given time period.Trade surplus: the amount by which the value of exports exceeds the value of imports in a given time period.17-*Table 17.117-*Motivation to TradeSpecialization increases total output.The gain from trade increases world output and thus generates a higher standard of living in both countries.Consumers in both countries gain more choice and can buy at lower prices.17-*Production and Consumption PossibilitiesConsumption possibilities: the alternative combinations of goods and services that a country could consume in a given time period.No trade? A country’s consumption possibilities must equal its production possibilities.International trade breaks the link between production possibilities and consumption possibilities.17-*Figure 17.117-*Production and Consumption with TradeChanging the mix of output results in a higher level of total output.International trade allows each country to specialize in what it does best.With trade, a country’s consumption possibilities exceed its production possibilities.17-*Trade Increases Specialization and OutputThe increase in the combined output of both countries is the gain from trading.The gains from trade are due to specialization in production.17-*Comparative AdvantageComparative advantage: the ability of a country to produce a specific good at a lower opportunity cost than its trading partners.A country should specialize in producing goods and services for which it has the lowest opportunity cost.17-*Comparative AdvantageComparative advantage refers to the relative (opportunity) costs of producing particular goods.World output, and thus the potential gains from trade, will be maximized when each country pursues its comparative advantage.17-*Absolute Costs Don’t CountAbsolute advantage: the ability of a country to produce a specific good with fewer resources (per unit of output) than other countries.It is not the absolute cost of production that determines a nation’s comparative advantage, it is the opportunity cost.17-*Limits to the Terms of TradeA country will not trade unless the terms of trade are superior to domestic opportunity costs.The terms of trade between any two countries will lie somewhere between their respective opportunity costs in production.17-*The Market MechanismImport/export decisions are made by consumers and producers.Market participants focus on prices.The terms of trade, like the price of any good, depend on the willingness of market participants to buy or sell at various prices.17-*Protectionist PressuresAlthough the potential gains from world trade are impressive, not everyone supports free trade.17-*Microeconomic LosersWorkers and producers who compete with imported products – who work in import-competing industries –have an economic interest in restricting trade.Trade can redistribute income from high-cost import-competing industries to low-cost, internationally competitive export industries.17-*The Net GainThe gains from trade are greater than the losses.Consumers in general enjoy a higher standard of living as a result of international trade.Trade restrictions designed to protect special interests reduce the total gain from trade, and consumers pay more.17-*Barriers to TradeThe losses associated with imports give rise to a constant clamor for trade restrictions.These are two types of barriers to trade:Tariff: a tax (duty) imposed on imported goods.Quota: a limit on the quantity of a good that may be imported in a given time period.17-*Exchange RatesSo long as each nation has its own currency, every trade will require use of two different currencies at some point.Exchange rate: the price of one country’s currency expressed in terms of another country’s currency.17-*Appreciation/DepreciationWhenever exchange rates change, so does the global price of all imports and exports.Currency appreciation: an increase in the value of one currency relative to another.Currency depreciation: a decrease in the value of one currency relative to another.17-*Depreciation:If the value of the U.S. dollar declines:U.S. exports become cheaper.U.S. imports become more expensive.Appreciation:If the value of the U.S. dollar increases:U.S. exports become more expensive.U.S. imports become cheaper.Appreciation/Depreciation17-*Foreign Exchange MarketsExchange rates change when either the supply or the demand for a currency shifts.17-*Figure 17.317-*WTOThe WTO was created to replace GATT.In effect, the WTO is now the world’s trade police force.The WTO is empowered to:Cite nations that violate trade agreements. Impose remedial action when violations persist.17-*