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McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 17International
Trade:Does It
Jeopardize American
Jobs?
1-2©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-2
Chapter Outline
• What We Trade And With Whom• The Benefits From Trade• Barriers To Trade• Trade As A Diplomatic Weapon• Kick it Up and Notch: Costs of
Protectionism
1-3©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-3
Exports and ImportsAs a percentage of GDP
1-4©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-4
What We Trade: Exports (2009)
Good Billions of Dollars of Exports
Elec. Mach. Aud & Video
105.0
Motor Vehicles 95.0Transportation Equipment
84.0
Petroleum 62.7Industrial Mach. 56.5Services 503.0
1,780.5
1-5©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-5
What We Trade: Imports (2009)
Good Billions of Dollars of Imports
Petroleum 329.6Motor Vehicles 179.1Telecommunication Eq 137.3
Elec. Mach. Aud & Video 119.7Office Machines 113.5Services 370.0Total 2,282.1
1-6©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-6
With Whom We Trade
1-7©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-7
Comparative and Absolute Advantage
• Absolute Advantage: the ability to produce a good better, faster, or more quickly than a competitor
• Comparative Advantage: the ability to produce a good at a lower opportunity cost of the resources used
1-8©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-8
The Benefits of Trade: When Comparative and Absolute Advantage are the same
Coffee ApplesUnited States
1 2
Brazil 2 1
Suppose there are two countries, the United States and Brazil, and two goods, Apples and Coffee, and the production per unit of labor is shown in the table below.
Clearly, there are benefits from trade. If the Americans focus on apples and the Brazilians focus on coffee and they trade with one another, more apples and more coffee is available to both countries.
1-9©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-9
The Benefits of Trade: When Comparative and Absolute
Advantage are Not the Same
Coffee ApplesUnited States
3 2
Brazil 2 1
Now suppose the Americans are better at producing both goods. The Americans have an absolute advantage in both but a comparative advantage in only Apples.
There are still benefits from trade. If the Americans focus on apple production and the Brazilians focus on coffee production and they trade with one another more apples and coffee is available to both countries.
1-10©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-10
Terms-of-trade
• The amount of a good one country must give up in order to obtain another good from the other country, usually expressed as a ratio.
1-11©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-11
Using Production Possibilities Frontiers
Apples
Coffee
Apples
Coffee
Brazil United States
Production Possibilities Frontier
Production
Possibilities Frontier
1-12©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-12
Consumption Possibilities Frontier with Trade
Apples
Coffee
Consumption Possibilities Frontier
1-13©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-13
Reasons For Limiting Trade That Many Economists Support
• National Security• National Identity
• Both of the above can be overstated easily.
• Environmental Concerns• Child-Labor Concerns
1-14©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-14
Reasons for Limiting Trade that Most Economists Do Not Support• To protect industries from
competition• To 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.
1-15©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-15
Methods of Limiting Trade
• Tariffs: a tax on imports• Quotas: a legal restriction on
the amount of a good coming into the country
• Non-tariff barriers: barriers to trade that result from regulatory actions
1-16©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-16
Cost of Limiting Trade
Q/t
S
D
P
Q/t
Domestic Market
Pworld
S
D
PWorld Market
PworldPdomestic
Qd
A
B
C
Q’s Q’d
EF
1-17©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-17
Tariffs vs. Quotas
Plimit
C
A
B
E
P
Q/t
D
S
P*
Q*Qlimit
Limiting trade with a quota
S’
}Tariff
F Limiting trade with a tariffA tariff raises tax revenue and a quota does not.
1-18©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-18
Costs of Protection• Whether 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.
1-19©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 17-19
Trade as a Diplomatic Weapon
• Trade sanctions have failed• To get Castro out of Cuba.• To 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.
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