Macro Chapter 17

Macro Chapter 18Gaining from International Trade16 Learning GoalsRealize the size and growth of trade for the United StatesExplain why specialization and trade generate gainsApply supply and demand analysis to international tradeDescribe the kinds of trade barriers and their effectsRecognize reasons for implementing trade restrictions (on your own)Clear up common misconceptions of international trade2The Trade Sector of the United States3The trade sector is a growing portion of GDP

ImportsExports4Gains from Specialization and Trade5Comparative vs. Absolute Advantage:Comparative advantage reveals opportunity costsAbsolute advantage does not; it simply means who can produce more

6Rules:(1) Make and trade away the good for which you have a comparative advantage(2) Trade for (receive) the good for which you dont have a comparative advantage7How do you know if you have a comparative advantage?You have a comparative advantage if you have a lower opportunity cost than someone else.8Supply, Demand, and International Trade9Graph of surplus:10Graph of shortage:11Who is helped/harmed?With exports:US consumers pay a higher world priceForeign consumers buy more productsUS producers receive a higher world priceUS producers sell more productsWith imports:US consumers pay a lower world priceForeign producers sell more productsUS producers receive a lower world priceUS producers sell fewer productsWith exports and imports:The benefits outweigh the costs; a net gain existsThe Economics of Trade Restrictions13Main point: Generally, any trade restriction will reduce quantity, increase consumer prices, and create a deadweight loss (elimination of gains from trade).A tariff is a tax on imports (it raises the price so quantity demanded will fall); it reduces imports and generates revenue for the governmentA quota is a limit on the physical units that can be imported; it generates no revenue14Why Do Nations Adopt Trade Restrictions?15Make sure to read carefully Learning Goal 5: Recognize reasons for implementing trade restrictions (on your own)16Trade Barriers and Popular Trade Fallacies17Read this section very carefully on your own18A country cannot simultaneously reduce imports and increase exports for an extended period of time

ImportsExports19Huge point (that most people dont understand):Our imports give purchasing power to foreigners. They, in turn, purchase our exports.If we limited imports, we would limit the income of foreigners and they wouldnt be able to buy as many of our exports.Thats why imports and exports are positively related20Here are more accurate statements about free trade:Free trade is harmful to some Americans but is helpful to AmericaMore people are helped by free trade than are hurt by free trade (i.e. America experiences a net gain)21Graph 1: Total employment has increased while exports and imports have increased

EmploymentImportsExports22Graph 2: The unemployment rate is inversely related to exports and imports

Unemployment RateImportsExports23Graph 3: An increase in the trade sector has not caused inflation

Inflation RateImportsExports24Graph 4: Per Capita Income has increased while both exports and imports have increased

Per Capita IncomeImportsExports25