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Open-Economy Macroeconomics: Basic Concepts

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Could we build A Jet Liner Without World Trade?

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Why Trade? 1. There is uneven distribution of natural resources. 2. Efficient production of goods requires different technologies and combinations of resources 3. Produce items that differ in quality Results of the trade: 1. Specialization which increases productivity and are able to purchase more goods and services comparative advantage v. absolute advantage 2. Supplement your domestic PPC with a new trading possibilities line

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PPC for two countries CountryOutput before specialization USA18 wheat 12 coffee Brazil8 wheat 4 coffee

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Specialization If the United States and Brazil specialize in the good in which they hold the comparative advantage: CountryOutputs before specialization Outputs after specialization USA18 Wheat30 wheat 12 coffee0 coffee Brazil8 wheat0 wheat 4 coffee20 coffee

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World trade analysis Who Benefits? Consumers can buy more and different products at a lower price Domestic Industries Export industries Who is hurt? Import competing firms Domestic consumers of export industries Mobility of capital and workers

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International Flows of Goods & Capital 2 Closed economy - does not interact with other economies in the world Open economy - interacts freely with other economies around the world

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Flow of goods: exports, imports,& net exports 3 Exports domestically produced goods and services that are sold abroad Imports - goods and services produced abroad sold domestically

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Trade Barriers Revenue TariffsTaxes placed on imported goods not produced domestically Protective TariffsTaxes placed on goods to shield domestic producers from foreign competition Import QuotasQuantity restrictions on imported goods Voluntary Trade RestrictionsQuotas that an exporting country places on its own products Government subsidyPayments to domestic companies which allows for production at a lower cost NON TARIFF BARRIERS Product Standards and RegulationsHealth and safety rules to guarantee minimum standard of quality which are often disguising an import quota Red TapeBureaucracy involved in exporting products to a particular country licensing DumpingCharging a price for an exported good that is below the actual cost of production to undercut the competition

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Protectionism and Free Trade

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Economic Impact of Tariffs Direct effects: 1. Decline in consumption since the price is higher with less competition 2. Increased domestic production spurred by the higher price in the market 3. Decline in imports caused by lower consumption of the foreign good 4. Government gains portion of what consumers lose by paying more for the good Indirect Effects 1.Promote the expansion of inefficient industries which do not have the comparative advantage and cause the contraction of those industries which do have the comparative advantage

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