1. INTERNATIONAL TRADE: DOES IT JEOPARDIZE AMERICAN JOBS?
Chapter 14
INTERNATIONAL TRADE:
DOES IT JEOPARDIZE AMERICAN JOBS?

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

3. Exports and Imports As a percentage of GDP

4. What We Trade:Exports (2002)
Good
Billions of Dollars of Exports
Chemicals
80.5
Food and Agricultural
Products
55.6
Computers
145.9
Airplanes and Parts
56.4
Motor Vehicles
70.6
Services
292.2
Total
974.1

5. What We Trade: Imports (2002)
Good
Billions of Dollars of Imports
Computers and Semiconductors
120.9
Petroleum
21.9
Chemicals
83.8
Audio and Video Equipment.
311
Motor Vehicles
186.8
Services
227.4
Total
1392.1

6. With Whom We Trade 2002 Country Exports in billions
Imports in billions
Balance
Canada
160.8
210.6
-49.8
Mexico
97.5
134.7
-37.2
Japan
51.4
121.5
-70.1
China
22.1
125.2
-103.1
Mid East
18.9
34.4
-15.5
Other Asia
101.1
175.2
-74.1
W. Europe
157.1
246.3
-89.2
Africa
10.7
22.2
-11.5
World
693.5
1163.6
-470.1

7. 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

8. The Benefits of Trade: When Comparative and Absolute Advantage are the same
Suppose there are two countries, Germany and Italy, and two goods, beer and sausage, and the production per unit of labor is shown in the table below.
Beer
Sausage
Germany 2 1
Italy
Clearly, there are benefits from trade. If the Germans focus on beer production and the Italians focus on sausage production and they trade with one another more beer and more sausage is available to both countries.

9. The Benefits of Trade: When Comparative and Absolute Advantage are Not the same
Now suppose the Germans are better at producing both goods. The Germans have an absolute advantage in both but a comparative advantage in only beer.
Beer
Sausage
Germany 2 3
Italy 1
There are still benefits from trade. If the Germans focus on beer production and the Italians focus on sausage production and they trade with one another more beer and more sausage is available to both countries.

10. 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.

11. Using Production Possibilities Frontiers
Beer
Italy
Germany
Beer
Production
Possibilities Frontier
Production Possibilities Frontier
Sausage
Sausage

12. Consumption Possibilities Frontier with Trade
Beer
Consumption Possibilities Frontier
Sausage

13. 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

14. 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. 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

16. } Tariffs vs. Quotas P Limiting trade with a quota
Q/t D S P* Q* S’ }
Tariff F
Plimit C A B
Limiting trade with a quota
Qlimit
Limiting trade with a tariff
A tariff raises tax revenue and
a quota does not.

17. 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.

18. 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.