1. International Trade

2. U.S. Trade Patterns Imports and Exports
Imports are goods and services purchased from foreign sources.
Exports are goods and services sold to foreign buyers.

3. Imports The U.S. imports over $1 trillion worth of goods and services.
Total imports represent 12% of total GDP.

4. Exports Exports were just under $700 billion in 2000.
Exports account for about 11% of total output.

5. Exports in Relation to GDP10 20 30 40 50 60 70 80 90
100
EXPORTS (percentage of GDP)
Exports in 1999
Myanmar 1 10
Brazil 11
Japan 12
United States 27
Germany 29
Great Britain 31
Mexico 41
Canada 44
Sweden 47
Kuwait 57
Thailand
Belgium 73

6. Trade balance = exports – imports
Trade Balances
Imports and exports are seldom equal.
The trade balance is the difference between exports and imports.
Trade balance = exports – imports

7. Trade Balances
Trade deficit — the amount by which the value of imports exceeds the value of exports in a given time period.

8. Trade Balances
Trade surplus — the amount by which the value of exports exceeds the value of imports in a given time period.

9. Trade Balances
Any imbalance in trade in the world must be offset by reverse balances elsewhere in the world.

10. Trade Balances
The U.S. typically has merchandise deficit, a services surplus, and an overall trade deficit.

11. Trade Balances

12. Bilateral Trade Balances Top Deficit Countries

13. Bilateral Trade Balances Top Surplus Countries

14. Motivation to Trade
Specialization increases total world output.

15. Gains From Trade Increased world output.
A higher standard of living in both countries.

16. Production and Consumption Without Trade
The gains from trade may be illustrated using a production possibilities curve.
The production-possibilities curve defines the limits to what a country can produce.

17. Production and Consumption Without Trade
In the absence of trade, a country cannot consume more than it produces.

18. Consumption Possibilities
Without trade, a country’s consumption possibilities equals its production possibilities.
Consumption possibilities are the alternative combinations of goods and services that a country could consume in a given time period.

19. Consumption Possibilities Without Trade

20. Consumption Possibilities Without Trade
(a) U.S. production possibilities
(zillions of loaves per year)
OUTPUT OF BREAD
OUTPUT OF WINE (zillions of barrels per year) 60 10 20 30 40 50 80
100 A B C D E F

21. Consumption Possibilities Without Trade
(b) French production possibilities 25 20 G 15
(zillions of loaves per year)
OUTPUT OF BREAD H 10 I J 5 K L 10 20 30 40 50 60
OUTPUT OF WINE(zillions of barrels per year)

22. Production and Consumption With Trade
Changing the mix of output results in a higher total level of output.
International trade allows each country to focus on what it does best.

23. Trade Possibilities
When a country engages in international trade, its consumption possibilities exceed its production possibilities.

24. Consumption Combination Before Trade

25. Consumption Combination After Trade

26. Consumption Combination After Trade
(a) U.S. production and consumption
120 A
Production with trade
100
Consumption with trade 80
QUANTITY OF BREAD
(zillions of loaves per year) C 60 N D 40
Production and consumption without trade 20 10 20 30 40 50 60
QUANTITY OF WINE (zillions of barrels per year)

27. Consumption Combination After Trade
(b) French production and consumption 20 15
Consumption with trade I M 10
Production with trade
QUANTITY OF BREAD
(zillions of loaves per year)
Production and consumption without trade 5 K 10 20 30 40 50 60
QUANTITY OF WINE (zillions of barrels per year)

28. Gains from Specialization

29. Comparative Advantage
The ability of a country to produce a specific good or service at a lower opportunity cost than its trading partners.
Opportunity cost is the most desired goods or services that are forgone in order to obtain something else.

30. Comparative Advantage
A country should specialize in what it is relatively efficient at producing.
That is, goods for which it has the lowest opportunity costs.

31. Comparative Advantage
Comparative advantage refers to the relative (opportunity) cost of producing particular goods.

32. Comparative Advantage
World output and, thus, the potential gains from trade are maximized when each country pursues comparative advantage.

33. Absolute Costs Don’t Count
Absolute Advantage
The ability of a country to produce a specific good with fewer resources (per unit of output) than other countries.

34. Absolute Costs Don’t Count
It is not the absolute monetary cost of production that determines a nation’s comparative advantage.
It is the opportunity costs.

35. Terms of Trade The rate at which goods are exchanged
The amount of good A given up for good B in trade.

36. Limits to Terms of Trade
A country will not trade unless terms of trade are superior to domestic opportunity costs.

37. Limits to Terms of Trade
The terms of trade between any two countries will lie somewhere between their respective opportunity costs in production.

38. The Market Mechanism
Import/export decisions are left up to the market decisions of consumers and producers.

39. The Market Mechanism
Market participants tend to focus on prices.

40. The Market Mechanism
The terms of trade depend on the willingness of market participants to buy or sell at various prices.

41. Protectionist Pressures
Not everyone supports free trade.

42. Microeconomic Losers
Workers and producers who work in import-competing industries have an economic interest in restricting trade.

43. Microeconomic Losers
Trade redistributes income from import-competing industries to export industries.

44. Microeconomic Losers
Trade not only alters the mix of output but also redistributes income from competing industries to export industries.

45. The Net Gain
Microeconomic gains from trade are greater than the microeconomic losses.

46. The Net Gain
Trade restrictions designed to protect special microeconomic interests reduce the total gain from trade.

47. Barriers to Trade
The microeconomic losses caused by imports give rise to a constant clamor for trade restrictions.

48. Barriers to Trade Tariff Quota A tax (duty) imposed on imported goods.
A limit on the quantity of a good that may be imported in a given time period.

49. Barriers to Trade Nontariff Barrier
Protectionist measures designed to restrict trade.

50. Tariffs
50% of all U.S. imports – over 9,000 different products – are subject to tariffs.
Although individual tariffs vary widely, average tariff is 4%.

51. Tariffs
A tariff on imported goods makes them more expensive to domestic consumers.
It makes them less competitive with domestically produced goods.

52. Tariffs
Tariffs raise domestic prices and reduce quantity sold.

53. Quotas
Like all trade barriers, they reduce world efficiency and invite retaliatory action.

54. Quotas
Quotas put an absolute limit on imported sales – gives domestic producers opportunity to raise market price.

55. Quotas
Quotas are a much greater threat to competition than tariffs because they preclude additional imports at any price.

56. Impact of Trade Restrictions
(a) No-trade equilibrium D1 S1 p1
PRICE (dollars per unit) q1
QUANTITY (units per year)

57. Impact of Trade Restrictions
(b) Free-trade equilibrium D1 S1 S2 p2 p1
PRICE (dollars per unit) B qd q2 q1
QUANTITY (units per year)

58. Impact of Trade Restrictions
(c) Tariff-restricted trade D1 S1 p1
PRICE (dollars per unit) C p3 S3 p2 qt q3 S2 qd q1 q2
QUANTITY (units per year)

59. Impact of Trade Restrictions
(d) Quota-restricted trade D1 S1 S4 Q p1
PRICE (dollars per unit) p4 q4 p2 q1 q2
QUANTITY (units per year)

60. Nontariff Barriers
U.S. uses nontariff barriers to restrict roughly 15% of its imports.
Examples include product standards, licensing restrictions, and restrictive procurement practices.

61. Nontariff Barriers
In , the European Union banned imports of U.S. beef, arguing that the use of hormones on U.S. ranches created a health hazard for European consumers.

62. Nontariff Barriers
Japan uses these to restrict nearly 30% of its imports.

63. Exchange Rates
Every trade will require two different currencies as long as each nation has its own currency.

64. Exchange Rates
The exchange rate is the price of one country’s currency expressed in terms of another country’s currency.

65. The Euro Market $1.15 1.10 Euros demanded by: Supply
QUANTITY OF EUROS (euros per year)
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
$1.15 E
Supply
Demand
Euros demanded by:
U.S. travelers to Europe
U.S. consumers buying European exports
U.S. investors in European markets
Euros supplied by:
European consumers
European travelers
European investors in U.S. markets

66. Global Pricing
The cost of a good depends on:

67. Appreciation/Depreciation
Global prices of all imports and exports change whenever exchange rates change.

68. Currency Appreciation
An increase in the value of one currency relative to another.

69. Currency Depreciation
A decrease in the value of one currency relative to another.

70. Currency Depreciation
If the value of a nation’s currency declines:
Its exports become cheaper.
Its imports become more expensive.

71. Foreign Exchange Markets
Exchange rates change when either the supply or demand for a currency shift.

72. Currency Appreciation
QUANTITY OF EUROS (euros per year)
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
$1.15 S
An increase in euro demand causes it to appreciate. E2 E1 D1 D2

73. Policing World Trade
Trade policy is a continuing conflict between the benefits of comparative advantage and protectionism.

74. GATT — General Agreement on Tariffs and Trade (1948)
Purpose:
Pursue free trade policies.
Extend equal access – most favored nation status – to domestic markets for all GATT members.

75. GATT — General Agreement on Tariffs and Trade
Tariff rates in developed countries averaged 40 percent when GATT was first signed.

76. GATT — General Agreement on Tariffs and Trade
First seven GATT rounds lowered tariffs to an average of 6.3 percent.

77. GATT — General Agreement on Tariffs and Trade
The Uruguay Round (1994) lowered tariffs to 3.9 percent.

78. WTO — World Trade Organization
Created to replace GATT.
The WTO is empowered to cite nations that violate trade agreements and to impose remedial action when violations persist.

79. WTO Protest
Some believe freer trade is a mixed blessing.

80. WTO Protest Environmentalists
Question the desirability of economic growth.
Worry about depletion of resources, congestion and pollution, and social friction that growth often promotes.

81. WTO Protest
Labor organizations worry that global competition will depress wages and working conditions.

82. WTO Protest
Many third-world nations are concerned about playing by trade rules that seem to benefit rich nations.

83. International Trade
End of Chapter 17