Chapter 37: International Trade

International TradeMcGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Some Key Trade FactsLO1Principal U.S. exports include:Principal U.S. imports include:ChemicalsAgricultural productsConsumer durablesSemiconductorsAircraft U.S. provides about 8.5% of world’s exportsPetroleumAutomobilesMetalsHousehold appliancesComputers37-*Economic Basis for TradeNations have different resource endowmentsLabor-intensive goodsLand-intensive goodsCapital-intensive goodsLO237-*AssumptionsTwo nationsSame size labor forceConstant costs in each countryDifferent costs between countriesU.S. absolute advantage in bothOpportunity cost ratioSlope of the curveVegetables sacrificed per ton of beefLO2Comparative Advantage37-*Vegetables (Tons)3025201510503540455101520Beef (Tons)Vegetables (Tons)30252015105035404551015202530Beef (Tons)(a) United States(b) Mexico121884AZComparative AdvantageLO237-*Comparative AdvantageLO237-*Comparative AdvantageTerms of tradeU.S. 1V = 1BU.S. will sell 1B for more than 1VMexico 2V = 1BMexico will pay less than 2V for 1BSettle between the twoDepends on supply/demand factorsAssume 1B = 1.5VLO237-*Comparative AdvantageGains from tradeTrading possibilities lineSlope equals terms of tradeImproved optionsComplete specializationMore of both goodsMore efficient resource allocationLO237-*Trade Barriers and Export SubsidiesTariffsRevenue tariffProtective tariffImport quotaNontariff barrier (NTB)Voluntary export restriction (VER)Export subsidyLO437-*Economic Impact of TariffsDirect effectsDecline in consumptionIncrease in domestic productionDecline in importsTariff revenueIndirect effectsLO437-*Economic Impact of QuotasDecline in consumptionIncrease in domestic productionDecline in importsQuotas do not provide for any government revenue but instead transfer it to foreign producersLO437-*The Case for ProtectionMilitary self-sufficiencyDiversification for stabilityInfant industry Protection against dumpingIncreased domestic employmentCheap foreign laborLO537-*GATTThree principles:Equal, nondiscriminatory trade between member nationsReduction in tariffsElimination of import quotasLO537-*WTOEstablished by Uruguay Round of GATT 153 member nations in 2010Oversees trade agreements and rules on disputesCritics argue that it may allow nations to circumvent environmental and worker-protection lawsLO537-*European UnionInitiated in 1958 as Common MarketAbolished tariffs and import quotas between member nationsEstablished common tariff with nations outside the EUCreated Euro Zone with one currencyLO537-*NAFTAAgreement between U.S., Canada, and MexicoEstablished a free trade zone between the countriesTrade has increased in all countriesEnhanced standard of livingLO537-*