1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

2 Chapter 31 International Trade 12/4/2015 © ©1999 South-Western College Publishing

3 This chapter discusses principles associated with © ©1999 South-Western College Publishing Customs Unions QuotasTariffsFree Trade Comparative AdvantageAbsolute AdvantageFree Trade Areas

4 Why do we trade? Because the costs of producing goods vary from country to country creating absolute or competitive advantages for trade © ©1999 South-Western College Publishing

5 If Illinois produced corn & oil, how much of each would it produce? © ©1999 South-Western College Publishing

6 6 Assumptions 1. Sealed off economy 2. Two-goods economy 3. Labor is the only resource 4. 1 hour of labor needed for both 5. There are 200 labor hours 6. Ignore law of increasing costs Corn (bushels) Oil (barrels) a c b 200

7 What does the previous Production Possibilities Curve illustrate? In order for Illinois to have one bushel unit of corn, it has to give up one barrel of oil, and vice versa © ©1999 South-Western College Publishing

8 8 Assumptions 1. Sealed off economy 2. Two-goods economy 3. Labor is the only resource 4. 4 hours of labor needed for a bushel of corn and 20 minutes for a barrel of oil 5. There are 200 labor hours 6. Ignore law of increasing costs Corn (bushels) Oil (barrels) a c b For Oklahoma

9 What does the Oklahoma Production Possibilities Curve illustrate? To produce a bushel of corn, it has to give up 12 barrels of oil. © ©1999 South-Western College Publishing

10 It pays Illinois and Oklahoma to trade because: © ©1999 South-Western College Publishing An Oklahoma oiler can take a barrel of oil to Illinois and trade it for a bushel of corn An Illinois farmer can take a bushel of corn to Oklahoma and trade it for 12 barrels of oil

11 How much better off would Illinois and Oklahoma be if both specialize? © ©1999 South-Western College Publishing

12 12 © ©1999 South-Western College Publishing Illinois Oklahoma Total NO TRADE FREE TRADE Corn Oil Corn Oil

13 What is Free Trade? International trade that is not encumbered by protectionist government policies, such as tariffs and quotas © ©1999 South-Western College Publishing

14 What is International Specialization? The use of a country’s resources to produce specific goods and services, allowing other countries to focus on the production of other goods and services © ©1999 South-Western College Publishing

15 If a country can produce a good using fewer resources than another country, should it always produce that good ? Not necessarily Only if it has a comparative advantage in that good. © ©1999 South-Western College Publishing

16 What is Absolute Advantage? A country’s ability to produce a good using fewer resources than those the country it trades with uses © ©1999 South-Western College Publishing

17 What is Comparative Advantage? A country’s ability to produce a good at a lower opportunity cost than the country with which it trades © ©1999 South-Western College Publishing

18 What is an example of Comparative Advantage? Even if Americans used fewer resources than China in making wicker baskets, our opportunity costs would probably be higher © ©1999 South-Western College Publishing

19 What are Imports? Goods and services bought by people in one county that are produced in other countries © ©1999 South-Western College Publishing

20 What are Exports? Goods and services produced by people in one country that are sold in other countries © ©1999 South-Western College Publishing

21 What are Terms of Trade? The amount of a good or service (export) that must be given up to buy a unit of anther good or service (import) © ©1999 South-Western College Publishing

22 Which countries trade the most? United States Germany Japan France Belgium © ©1999 South-Western College Publishing

23 Who are our main trading partners? Canada Japan Mexico Germany Great Britain South Korea France Hong Kong Italy Brazil © ©1999 South-Western College Publishing

24 Check it out the following for more information on trade: tions/nsolo/wfb-all.htm /otea/usftu/usftu.html © ©1999 South-Western College Publishing

25 We trade the most with which country? Canada © ©1999 South-Western College Publishing

26 Why do countries restrict trade? To protect domestic industry © ©1999 South-Western College Publishing

27 What are the arguments for Trade Restrictions? © ©1999 South-Western College Publishing

28 © ©1999 South-Western College Publishing -Retaliation -Cheap foreign labor -Protect declining industries -Reduce unemployment -Protect against dumping -National security -Protect infant industries -Diversity of industry

29 What are the arguments against trade restrictions? © ©1999 South-Western College Publishing

30 -Leads to retaliation -Subsidizes weakness -No comparative advantage -Problems with enforcing -Encourages favoritism © ©1999 South-Western College Publishing

31 How is trade restricted? tariffs import quotas export subsidies licensing agreement unreasonable standards © ©1999 South-Western College Publishing

32 What is a Tariff? A tax on an imported good © ©1999 South-Western College Publishing

33 What is a Quota? A limit on the quantity of a specific good that can be imported © ©1999 South-Western College Publishing

34 What are other Nontariff barriers? Restrictive health and safety standards Politically imposed “voluntary” limits © ©1999 South-Western College Publishing

35 What is the goal of the General Agreement on Tariffs & Trade (GATT)? Reduce tariff rates © ©1999 South-Western College Publishing

36 What is a Customs Union? A group of countries that agrees to free trade among themselves and promotes a common trade policy © ©1999 South-Western College Publishing

37 What is the European Economic Community? The EEC is a market in Europe begun in 1958 as a way of creating barrier- free trade in Europe © ©1999 South-Western College Publishing

38 Who makes up the EEC? France Italy Belgium Holland Germany Luxembourg Britain Ireland © ©1999 South-Western College Publishing Denmark Greece Spain Portugal Iceland Finland Sweden Austria

39 What is a Free Trade Area? A group of countries that agree to free trade among themselves but are free to pursue independent trade policies with other countries © ©1999 South-Western College Publishing

40 What is the North American Free Trade Agreement? A free trade area between USA, Canada, and Mexico © ©1999 South-Western College Publishing

41 How high are tariffs? U.S. 5.9% Canada 10.5% Australia 9.8% Japan 6.3% EC 6.7% © ©1999 South-Western College Publishing

42 42 © ©1999 South-Western College Publishing /economic/trade_reports ments/freetrade/wta- 94/nav/toc.html

43 Why do we trade between regions and between countries?Why do we trade between regions and between countries? What is Free Trade? Should a country produce those goods it is best at producing?Should a country produce those goods it is best at producing? What is Absolute Advantage? What is Comparative Advantage? What are Imports? What are Exports?

44 What are the arguments for Trade Restrictions?What are the arguments for Trade Restrictions? What are the arguments against trade restrictions?What are the arguments against trade restrictions? How is trade restricted? What is a Tariff? What is a Quota? What is GATT? What is the EEC? What is NAFTA?

45 ENDEND © ©1999 South-Western College Publishing