chapter 17 international trade - dr. nghia trong … 17 international trade 1 part four: ... u.s....
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CHAPTER 17
International Trade
1
Part Four: Microeconomics of Government and International
Economics
Slides prepared by Bruno Fullone,
George Brown College ©2010 McGraw-Hill Ryerson Ltd.
Chapter 17
2
In this chapter you will learn:
17.1 About specialization, comparative advantage,
and international trade
17.2 About supply and demand analysis of exports
and imports
17.3 About trade barriers and their negative effects on
nations’ economic well-being
3 LO 17.1
17.1The Economic Basis for Trade
Why do nations trade?
• The distribution of resources is uneven
• Efficient production requires different
technologies or resource combinations
• Products are differentiated as to quality
and other non-price attributes
LO 17.1 4
The Economic Basis for Trade
• Labour-intensive goods
• Land-intensive goods
• Capital-intensive goods
LO 17.1 5
Specialization and Comparative
Advantage
The Basic Principle
• Specialization according to comparative
advantage reduces costs
• Absolute advantage
LO 17.1 6
Specialization and Comparative
Advantage
Two isolated nations (Canada and Brazil)
1. Constant Costs
– Straight-line production possibilities curves
2. Different Costs
– Different technology and resources
3. Canada Has Absolute Advantage in Both
Steel and Soybeans
LO 17.1 7
So
yb
ea
ns
(to
nn
es
)
5 8 10 15 20
Canada Brazil
5 10 15 18 20 25 30
Steel (tonnes)
So
yb
ea
ns
(to
nn
es
)
A
30
25
20
15
12
10
5
0
18 steel
12 soybeans
30
25
20
15
10
4
0
B
8 steel
4 soybeans
Steel (tonnes)
Production Possibilities Curve Figure 17-1
LO 17.1 8
Opportunity Cost Table
Country 1 Steel Cost 1 Soybean
Cost
Canada 1 soybean 1 steel
Brazil 2 soybeans .5 steel
Who has the comparative advantage in steel?
Specialization Based on Comparative
Advantage
LO 17.1 9
Opportunity Cost Table
Country 1 Steel Cost 1 Soybean
Cost
Canada 1 soybean 1 steel
Brazil 2 soybeans .5 steel
Who has the comparative advantage in soy?
Specialization Based on Comparative
Advantage
10 LO 17.1
Terms of Trade
•What will the terms of trade be?
•Many possibilities
•For trade to be mutually beneficial the
terms of trade must be between each
nation’s opportunity costs
LO 17.1 11
Country 1 Steel Cost 1 Soybean Cost
Canada 1 soybean 1 steel
Brazil 2 soybeans .5 steel
Opportunity Cost Table
for example:
• 1 steel for 1.5 soybeans
• gains from trade can be illustrated with
trading possibilities line
Terms of Trade
LO 17.1 12
45
40
35
30
25
20
15
12
10
5
0
30
25
20
15
10
4
0
5 10 15 18 20 25 30 5 8 10 15 20
A
B
Canada Brazil
So
yb
ean
s (
ton
nes)
So
yb
ean
s (
ton
nes)
Steel (tonnes) Steel (tonnes)
Trading
possibilities
line Trading
possibilities
line
Trading Possibilities Lines and the Gains from
Trade
1.5 soy for 1
steel
.67 steel for
1 soy
Figure 17-2
15 LO 17.1
Trade with Increasing Costs
A more realistic model:
Increasing opportunity costs
Less than complete specialization
16 LO 17.1
The Case for Trade Restated
•Through free trade based on the principle of
comparative advantage, the world economy can
achieve a more efficient allocation of resources
and a higher level of material well-being than
without free trade
•Side benefits:
•Promotion of competition; deterrence of monopoly
•Linking of national interests; reduction of national
animosities
17 LO 17.1
17.2 Supply and Demand Analysis of
Exports and Imports
•When world prices increase relative to
domestic prices, domestic exports will
increase, resulting in an upward
sloping export supply curve
•When world prices decrease relative
to domestic prices, domestic imports
will increase, resulting in a downward
sloping import demand curve
LO 17.2 18
Cdn. domestic aluminum market Cdn. export supply and
import demand
100 50
Sd
Dd
100 50 75 125 150
If the world price
exceeds the Cdn.
price by 25 cents...
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
$1.75
1.50
1.25
1.00
.75
$1.75
1.50
1.25
1.00
.75
Canadian Export Supply and Import Demand
Figure 17-3
LO 17.2
19 100 50
Sd
Dd
100 50 75 125 150
EXPORTS = 50 SURPLUS = 50
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
Cdn. domestic aluminum market Cdn. export supply and
import demand
$1.75
1.50
1.25
1.00
.75
$1.75
1.50
1.25
1.00
.75
If the world price
goes further up...
Canadian Export Supply and Import Demand
LO 17.2
20 100 50
Sd
Dd
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
100 50 75 125 150
Cdn.
export
supply
SURPLUS = 100 EXPORTS = 100
Cdn. domestic aluminum market Cdn. export supply and
import demand
$1.75
1.50
1.25
1.00
.75
$1.75
1.50
1.25
1.00
.75
If world prices
fall below $1.25...
Canadian Export Supply and Import Demand
LO 17.2 21
100 50
Sd
Dd
100 50 75 125 150
Cdn.
export
supply
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
Cdn. domestic aluminum market Cdn. export supply and
import demand
$1.75
1.50
1.25
1.00
.75
$1.75
1.50
1.25
1.00
.75
SHORTAGE = 50 IMPORTS = 50
Canadian Export Supply and Import Demand
LO 17.2
22 100 50
Sd
Dd
100 50 75 125 150
SHORTAGE = 100
Cdn.
import
demand
Cdn.
export
supply
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
Cdn. domestic aluminum market Cdn. export supply and
import demand
$1.75
1.50
1.25
1.00
.75
$1.75
1.50
1.25
1.00
.75
IMPORTS = 100
Canadian Export Supply and Import Demand
LO 17.2 23
U.S. domestic aluminum market U.S. export supply and
import demand
$1.50
1.25
1.00
.75
.50
100 50
$1.50
1.25
1.00
.75
.50
Sd
Dd
100 50 75 125 150
SURPLUS = 50
SURPLUS = 100
U.S.
export
supply
EXPORTS = 50
EXPORTS = 100
SHORTAGE = 50 IMPORTS = 50
SHORTAGE = 100 IMPORTS = 100
U.S.
import
demand P
rice (
per
kg
. C
dn
. d
oll
ars
)
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
U.S. Export Supply and Import Demand Figure 17-4
LO 17.2 24
1.25
1.125
1.00
Pri
ce (
per
kg
. C
dn
. d
oll
ars
)
Cdn.
export
supply
Cdn.
import
demand
U.S.
export
supply
U.S.
import
demand
e
World price is where:
U.S. export supply
= Cdn. import
demand
25
Figure 17-5 Equilibrium World Price
and Quantity of Exports and Imports
25 LO 17.2
Equilibrium World Price, Exports, and Imports
•International equilibrium occurs when one nation’s import demand curve intersects another nation’s export supply curve
•Americans will pay more for aluminum with trade than without it
•Americans are willing to export aluminum to Canada because they can gain from the trade (to import other goods)
•Canadians pay less for aluminum with trade; Canadians gain from the trade
26 LO 17.3
17.3 Trade Barriers
•Tariffs
•Revenue tariffs
•Protective tariffs
•Import Quotas
•Nontariff Barriers (NTBs)
•Voluntary Export Restraints
(VERs)
The Economic Effects of a Tariff or Quota
Quantity
Pri
ce
0
Dd
Sd
Pd
q
Sd + Q
Pt
Pw
a b c d
27
Figure 17-6
LO 17.3
28 LO 17.3
Economic Impact of Tariffs
•Direct Effects:
•Decline in Consumption
•Increased Domestic Production
•Decline in Imports
•Tariff Revenue
•Indirect Effects:
•Expansion of inefficient industries at the expense of relatively efficient ones
29 LO 17.3
Economic Impact of Quotas
•The same, without the tariff revenue for the
government
•Foreign firms reap the benefit of higher
prices
30 LO 17.3
Net Costs of Tariffs and Quotas
•Consumer costs
•Price of imported product goes up
•Some consumers shift purchases from
imports to higher-priced domestic goods
•Prices of domestic goods rise
•Gains to protected industries and
workers come at the expense of
much greater losses for the entire
economy
31 Chapter 17
The Last Word: Fair Trade Products
•Fair Trade Standards set up to help keep dominant sellers
from low income countries from keeping most of the proceeds
•More is paid to producers if more is paid to workers
•Economists question approach as an economic development
strategy
•Economists agree that some of the efforts of fair-trade
advocates have succeeded in channeling sizable purchases
away from otherwise identical substitutes and toward fair-
trade goods.
•Removal of agricultural subsidies may be a better tool