Chapter 17 International Trade

Random Stuff You Need to Know  Microeconomics-the study of the economic behavior and decision making of small units, such as individuals, families, and businesses (small unit of analysis)  Macroeconomics-the study of the behavior and decision making of entire economies (large unit of analysis)

Are we really global?   The global economy is often in the news. We often hear stories about the United States and its relationships with its trade partners: Canada, Mexico, Japan, China and the nations of the European Union. Yet for much of our history, foreign trade (the value of exports plus imports) has been a relatively small part of our economy.

Are we really global?   In 2000, foreign trade accounted for about 25% of GDP (gross domestic product) – –GDP: the total value of all final goods and services produced in a country for a particular period, valued at prices in that period   Only about 8% of our labor force is engaged in producing goods and services for export   Since international trade is a relatively small part of the economy, why is all the fuss about going global?

The Mystery of the Global Economy…   Has everything to do with the principles of economic reasoning…(which you must know for your final exam). – –People choose. – –People’s choices involve costs. – –People respond to incentives in predictable ways. – –People create economic systems that influence individual choices and incentives. – –People gain when they trade voluntarily. – –People’s choices have consequences that lie in the future.

True or False?   The global economy is a growing part of the US economy.   Some American workers benefit from international trade.   American consumers benefit from international trade.   Prices in the United States are lower because of international trade.   Trade barriers have been increasing around the world.

All American Kids?   Why don’t we buy only American clothes?   Read “activity one” and answer questions.

More Concepts to Know…   NAFTA (North American Free Trade Association) – –Trade agreement between Mexico, the United States, and Canada – –Purposes:   Reduce trade barriers between the countries in North America   Increase economic activity in North America   Improve the standard of living in member countries

More Concepts to Know…   World Trade Organization (WTO) – –153 members as of 2008 – –Purposes:   Promote trade among countries around the world by reducing trade barriers.   Establish common rules for trade.   Increase international trade.   Improve the world’s standard of living.

Why People Trade: Comparative Advantage To understand why people trade, we should review a couple of concepts from chapter 2.

What are factors of production?  Land (natural resources) –resources of nature that can be used in the production of goods and services  Labor –The human factor in production that includes natural ability and human capital –Economists measure a country’s human capital by examining literacy rates  Capital –resources produced for use in the production of goods and services

Factors of Production and Trade  The distribution of factors of production help determine what goods and services an economy produces.  Distribution of factors are determined by nature, a nation’s culture, and history.  The production possibilities curve is a graphical illustration of the alternative combinations of goods and services an economy can produce

Production Possibilities Model and Trade   The production possibilities model and curve show us efficient, inefficient and impossible levels of production.   In order to know what goods and services to produce and whether trade will benefit a particular economy, it is essential to understand the following terms: opportunity cost, absolute advantage, comparative advantage, specialization.

International Trade Concepts   Opportunity Cost: The highest-valued alternative that must be sacrificed (forgone) as a result of choosing among alternatives.  Calculated by: what is given up/what is obtained

International Trade Concepts  Absolute advantage-the ability to produce more of a given product using a given amount of resources; when an economy or individual can produce more of any good per unit of labor than another country or individual that country or person is said to have an absolute advantage  Comparative advantage-the ability to produce a product most efficiently given all the other products that could be produced; occurs if the opportunity cost of producing that good or service is lower for that economy than for any other; this is the basis for international trade theory

International Trade Concepts   Specialization: a method of assigning different tasks to different workers; law of comparative advantage economies should specialize in what they have the lowest opportunity cost in producing   According to Tregarthen & Rittenberg “specialization implies an economy is producing the goods and services in which it has a comparative advantage” (2000, p. D-9)

Why People Trade: Comparative Advantage   After reading activity 1, Lesson 41… – –Why do people trade? – –Why would the United States import bananas? – –What is comparative advantage?

Activity 2 Review   What was the main criterion for your choice of shoes?   Why is price important in your decisions?   What types of foreign produced products did the merchants you interviewed have for sale?   What did the people interviewed indicate were the main criteria for purchasing foreign goods?

Activity 3: The Home-Building Mystery   Was Ms. Brickstrom correct? Could both builders benefit by specializing their production? Why?   Did anyone think that the two builders should not trade? If so, why?

One v. Two-Way Trade  One-way (interindustry trade) occurs when countries specialize in producing the goods in which they have a comparative advantage and then exports those goods so they can import the goods in which they do not have a comparative advantage –Ex: importing bananas exporting cars  Two-way (intraindustry trade) occurs when countries both import and export the same or similar goods –Ex: importing and exporting cars, fruit etc.

Why Two-Way Trade   Variations in transportation costs – –May make more sense for a manufacturer in Maine to import raw materials from Eastern Canada than to get them from California   Seasonal effects – –Blueberries: we can’t grow them in the winter so we import them from Chile, but then in the summer we export them   Product differentiation – –Idea that the same type of product can vary tremendously – –Even though cars all have 4 wheels, a steering wheel and brakes, the quality and features of automobiles varies from producer to producer

Restrictions on International Trade (be able to define and explain the following)   Although free trade is economically the most efficient, all countries enact trade barriers—usually to protect domestic producers and workers from foreign competition   Protectionist policy- is one in which a country restricts the importation of goods and services produced in foreign countries   Effects of protectionism – –Decrease supply, increase equilibrium price, reduce equilibrium quantity   Tariffs and quotas are the most common methods of pursuing protectionism

Restrictions on International Trade (be able to define and explain the following)   Tariffs   Quotas   Voluntary Export Restrictions   Other: – –Safety standards – –Labeling requirements – –Pollution controls – –Quality restrictions

Justifications for Trade Restrictions (be able to identify these arguments for restricting trade and explain how economists would respond to each argument)   Infant Industries   Strategic Trade Policy   National Security   Job Protection   Cheap Foreign Labor   Retaliation Against Dumping   Differences in Environmental Standards