1. International Trade
4.1 and 4.2

3. Memory check Formula for GDP (aka AD) ? GDP = C +I+G+(X-M)
Formula for rGDP?
rGDP = C + I +G + (X-M)
Adjusted for inflation
(X-M) is aka Balance of Payments or Current Account Balance

4. Why trade What you have 4 factors of production AKA Endowments
Not equal worldwide

5. Canada

6. Alaska

7. Saudi Arabia

8. Phillipines

9. India

10. California

11. Absolute vs Comparative Advantage
Absolute Advantage
Reciprocal
Comparative Advantage
Specialization

12. Cost per unit in man hours
100
110 90 80

13. So… England has 1:1.1 ratio of cloth to wine
Portugal has 9:8 ratio of cloth to wine
Assume 1000 man hours available

14. In England a unit of cloth costs 100 and a unit of wine 120 units of labour; in Portugal a unit of cloth costs 90 and a unit of wine 80 units of labour’. (Ricardo)

15. ENGLAND
9.09 Wine A B
10 Cloth

16. PORTUGAL
12.5 Wine A B
11.1 Cloth

17. Assumptions There are no transport costs. Costs are constant
There are only two economies producing two goods.
The theory assumes that traded goods are homogeneous (ie identical).
Factors of production are assumed to be perfectly mobile.
There are no tariffs or other trade barriers.
There is perfect knowledge, so that all buyers and sellers know where the cheapest goods can be found internationally.

18. X A A2 B B2 Y

19. X A A2 B B2 Y

20. How we measure trade X M If X > M then…. If inverse….
But not whole picture
If X > M we assume C & I will grow BUT….

21. Grows when businesses spend on new
Factories, machines, office products etc
C + I + G + (X-M)
Grows when consumers spend money
Grows when Gov’t buys goods or services

22. So…. Could limiting M help C or I? Does limiting M always help C or I?
What role does G play in offsetting decreases in C or I due to increase in M or decrease in X?
What role does G play in facilitating X? (or M as the case may be?)

23. The Equilibrium without International Trade

24. International Trade in an Exporting Country

25. How Free Trade Affects an Exporting Country

26. International Trade in an Importing Country

27. How Free Trade Affects an Importing Country

28. II. Ways to approach trade
3 patterns
Protectionism
Free Trade
Fair Trade
And what is impact on GDP?

29. III. Protectionism
Methods:

30. Main methods of trade barriers
Tariffs (import duties) - import taxes
Quotas – volume limits imports allowed
Voluntary Export Restraint Agreements
Embargoes - a total ban on imported goods
Subsidies - a government payment to encourage domestic production by lowering their costs
Export subsidies
Import licensing systems
Exchange controls - limiting the amount of foreign currency that can move between countries

31. Effects Domestic Supply Price World Price Pw Imports Domestic DemandQs Qd
Output (Q)

32. Embargo
Domestic Supply
Price P
Domestic Demand Qs
Output (Q)

33. Import Tariffs Domestic Supply Price Pw + Tariff World Price Pw
Domestic Demand M Qs
Qs2
Qd2 Qd
Output (Q)

34. Tariffs Revenue Domestic Supply Price Pw + Tariff Revenue from Tariff
World Price Pw
Domestic Demand M Qs
Qs2
Qd2 Qd
Output (Q)

35. Effects of a quota
Visualize: World Price intersection of D is cheaper than domestic (S & D).
A Quota only allows in some products at World Price, rest goes back to Domestic prices (although slightly lower)

36. Summary of import control effects
Intervention Type
(domestic) quantity traded
Effect on consumer surplus
Effect on (domestic) producer surplus
Effect on Budget Finances
Production
Quotas
Falls;
Excess
Supply
Falls
Rise or
Fall
Zero
Import Tariffs
Rises
Positive
Import Quotas

37. Arguments for and against
Infant Industry
Senile Industry
Balance of Payments(X-M)
Anti dumping
Protect employment
To raise revenue for Gov’t (tariff=tax)
Costs more
Retaliation risk
Improperly applied
Less choice
Inefficient

38. Non economic arguments
Strategic (defense, retaliatory)
Product standards
Politically popular
QUIZ

39. 50 years of tariff reductions
GATT/WTO: 50 years of tariff reductions
Tariff reduction of industrial countries for industrial products, excluding petroleum
Implementation period
Round covered
Weighted tariff reduction
1948–63
First five GATT rounds (1947–62) 
–36
1968–72
Kennedy Round (1964–67) 
–37
1980–87
Tokyo Round (1973–1979) 
–33
1995–99
Uruguay Round (1986–94) 
–38
Note: Tariff reductions for the first five trade rounds refer to US only

40. Figure 6 The Effects of a Tariff

41. Figure 7 The Effects of an Import Quota

42. Figure 8 The Effects of an Export Subsidy
Without Subsidy
With Subsidy
CHANGE
Consumer Surplus
A+B
Producer Surplus
E+F+G
B+C+E+F+G
+(B+C)
Government Revenue
–(B+C+D)
Total Surplus
A+B+E+F+G
A+B–D+E+F+G –D