Chapter 15 International Trade: Does It Jeopardize American Jobs? Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

15-2 Chapter Outline WHAT WE TRADE AND WITH WHOM THE BENEFITS FROM TRADE BARRIERS TO TRADE TRADE AS A DIPLOMATIC WEAPON

15-3 You Are Here

15-4 Exports and Imports As a percentage of GDP

15-5 What We Trade: Exports (2007) GoodBillions of Dollars of Exports Industrial Eq198.5 Elec. Mach. Aud & Video148.4 Motor Vehicles107.0 Aerospace76.0 Optics66.3 Services ,645.7

15-6 What We Trade: Imports (2007) GoodBillions of Dollars of Imports Petroleum361.0 Industrial Eq250.2 Elec. Mach. Aud & Video248.9 Motor Vehicles214.5 Optics53.8 Services378.1 Total2,346.0

15-7 With Whom We Trade

15-8 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

15-9 The Benefits of Trade: When Comparative and Absolute Advantage are the same CoffeeApples United States12 Brazil21 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.

15-10 The Benefits of Trade: When Comparative and Absolute Advantage are Not the same CoffeeApples United States32 Brazil21 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.

15-11 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.

15-12 Using Production Possibilities Frontiers Apples Coffee Apples Coffee BrazilUnited States Production Possibilities Frontier Production Possibilities Frontier

15-13 Consumption Possibilities Frontier with Trade Apples Coffee Consumption Possibilities Frontier

15-14 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

15-15 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.

15-16 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

15-17 Cost of Limiting Trade Q/t S D P Domestic Market P world S D P World Market P world P domestic QdQd A B C Q’ s Q’ d EF

15-18 Tariffs vs. Quotas P limit C A B E P Q/t D S P* Q* Q limit Limiting trade with a quota S’ } Tariff F Limiting trade with a tariff A tariff raises tax revenue and a quota does not.

15-19 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.

15-20 Trade as a Diplomatic Weapon Trade sanctions have failed –To get Castro out of Cuba –To get Iran to release our hostages in –To get the Soviet Union out of Afghanistan. –To get Iraq out of Kuwait in 1990.