1. 1 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade

2. 2 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade

3. 3 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade CHAPTER 8 Comparative Advantage and the Gains from International Trade Fernando Quijano Prepared by: In early 2009, with unemployment rising and incomes falling during the recession, Congress and the Obama administration passed a stimulus bill to increase government spending.

4. 4 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade 8.1The United States in the International Economy Discuss the role of international trade in the U.S. economy. 8.2Comparative Advantage in International Trade Understand the difference between comparative advantage and absolute advantage in international trade. 8.3How Countries Gain from International Trade Explain how countries gain from international trade. 8.4Government Policies That Restrict International Trade Analyze the economic effects of government policies that restrict international trade. 8.5The Arguments over Trade Policies and Globalization Evaluate the arguments over trade policies and globalization. Appendix: Multinational Firms Understand why firms operate in more than one country. Chapter Outline and Learning Objectives Comparative Advantage and the Gains from International Trade CHAPTER 8

5. 5 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The United States in the International Economy Tariff A tax imposed by a government on imports. Imports Goods and services bought domestically but produced in other countries. Exports Goods and services produced domestically but sold in other countries. Discuss the role of international trade in the U.S. economy. 8.1 LEARNING OBJECTIVE

6. 6 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The United States in the International Economy The Importance of Trade to the U.S. Economy FIGURE 8-1 International Trade Is of Increasing Importance to the United States Exports and imports of goods and services as a percentage of total productionmeasured by GDP show the importance of international trade to an economy. Since 1950, both imports and exports have been steadily rising as a fraction of U.S.GDP. Discuss the role of international trade in the U.S. economy. 8.1 LEARNING OBJECTIVE

7. 7 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The United States in the International Economy U.S. International Trade in a World Context FIGURE 8-2 The Eight Leading Exporting Countries The United States is the leading exporting country, accounting for about 9.5 percent of total world exports. The values are the shares of total world exports of merchandise and commercial services. Discuss the role of international trade in the U.S. economy. 8.1 LEARNING OBJECTIVE

8. 8 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The United States in the International Economy U.S. International Trade in a World Context FIGURE 8-3 International Trade as a Percentage of GDP International trade is still less important to the United States than to most other countries. Discuss the role of international trade in the U.S. economy. 8.1 LEARNING OBJECTIVE

9. 9 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade How Caterpillar Depends on International Trade Making the Connection YOUR TURN: Test your understanding by doing related problem 1.5 at the end of this chapter. Caterpillar has become increasingly dependent over time on foreign markets. The firms exports rose from just over half of total sales in 2004 to more than two-thirds in 2008. Discuss the role of international trade in the U.S. economy. 8.1 LEARNING OBJECTIVE

10. 10 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Comparative Advantage in International Trade Understand the difference between comparative advantage and absolute advantage in international trade. 8.2 LEARNING OBJECTIVE A Brief Review of Comparative Advantage Comparative advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Opportunity cost The highest- valued alternative that must be given up to engage in an activity.

11. 11 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Comparative Advantage in International Trade TABLE 8-1 An Example of Japanese Workers Being More Productive Than American Workers OUTPUT PER HOUR OF WORK CELL PHONES DIGITAL MUSIC PLAYERS JAPAN126 UNITED STATES24 Absolute advantage The ability to produce more of a good or service than competitors when using the same amount of resources. Understand the difference between comparative advantage and absolute advantage in international trade. 8.2 LEARNING OBJECTIVE

12. 12 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Comparative Advantage in International Trade TABLE 8-2 The Opportunity Costs of Producing Cell Phones and Digital Music Players The table shows the opportunity cost each country faces in producing cell phones and digital music players. For example, the entry in the first row and second column shows that Japan must give up 2 cell phones for every digital music player it produces. OPPORTUNITY COSTS CELL PHONESDIGITAL MUSIC PLAYERS JAPAN0.5 digital music player2 cell phones UNITED STATES2 digital music players0.5 cell phone Understand the difference between comparative advantage and absolute advantage in international trade. 8.2 LEARNING OBJECTIVE

13. 13 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade How Countries Gain from International Trade Explain how countries gain from international trade. 8.3 LEARNING OBJECTIVE Autarky A situation in which a country does not trade with other countries. TABLE 8-3 Production without Trade PRODUCTION AND CONSUMPTION CELL PHONESDIGITAL MUSIC PLAYERS JAPAN 9,0001,500 UNITED STATES 1,5001,000

14. 14 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Increasing Consumption through Trade How Countries Gain from International Trade Terms of trade The ratio at which a country can trade its exports for imports from other countries. Explain how countries gain from international trade. 8.3 LEARNING OBJECTIVE

15. 15 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Increasing Consumption through Trade How Countries Gain from International Trade TABLE 8-4 Gains from Trade for Japan and the United States Explain how countries gain from international trade. 8.3 LEARNING OBJECTIVE

16. 16 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Solved Problem 8-3 The Gains from Trade YOUR TURN: For more practice, do related problems 3.4 and 3.5 at the end of this chapter. WITHOUT TRADE PRODUCTION AND CONSUMPTION CLOTHWINE Portugal England 18,000 63,000 123,000 18,000 GAINS FROM TRADE INCREASED CONSUMPTION Portugal England 9,000 wine 9,000 cloth WITH TRADE PRODUCTION WITH TRADETRADE CONSUMPTION WITH TRADE CLOTHWINECLOTHWINECLOTHWINE PORTUGAL0150,000Import 18,000 Export 18,000 18,000132,000 ENGLAND90,0000Export 18,000 Import 18,000 72,00018,000 Explain how countries gain from international trade. 8.3 LEARNING OBJECTIVE

17. 17 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Why Dont We See Complete Specialization? How Countries Gain from International Trade We do not see complete specialization in the real world for three main reasons: Not all goods and services are traded internationally. Production of most goods involves increasing opportunity costs. Tastes for products differ. Dont Let This Happen to YOU! Remember That Trade Creates Both Winners and Losers YOUR TURN: Test your understanding by doing related problem 3.12 at the end of this chapter. Explain how countries gain from international trade. 8.3 LEARNING OBJECTIVE

18. 18 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Does Anyone Lose as a Result of International Trade? How Countries Gain from International Trade In our cell phone and digital music player example, consumption increases in both the United States and Japan as a result of trade. Everyone gains, and no one loses. Or do they? In our example, we referred repeatedly to Japan or the United States producing cell phones or digital music players. But countries do not produce goodsfirms do. In a world without trade, there would be cell phone and digital music player firms in both Japan and the United States. In a world with trade, there would only be Japanese cell phone firms and U.S. digital music player firms. Japanese digital music player firms and U.S. cell phone firms would close. Overall, total employment will not change and production will increase as a result of trade. Nevertheless, the owners of Japanese digital music player firms, the owners of U.S. cell phone firms, and the people who work for them are worse off as a result of trade. Explain how countries gain from international trade. 8.3 LEARNING OBJECTIVE

19. 19 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Where Does Comparative Advantage Come From? How Countries Gain from International Trade Among the main sources of comparative advantage are the following: Climate and natural resources. This source of comparative advantage is the most obvious. Relative abundance of labor and capital. Some countries, such as the United States, have many highly skilled workers and a great deal of machinery. Technology. Broadly defined, technology is the process firms use to turn inputs into goods and services. External economies. External economies Reductions in a firms costs that result from an increase in the size of an industry. Explain how countries gain from international trade. 8.3 LEARNING OBJECTIVE

20. 20 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Why Is Dalton, Georgia, the Carpet-Making Capital of the World? Making the Connection YOUR TURN: Test your understanding by doing related problem 3.13 at the end of this chapter. Because Catherine Evans Whitener started making bedspreads by hand in Dalton, Georgia, 100 years ago, a multibillion-dollar carpet industry is now located there. Carpet production is highly automated and relies primarily on synthetic fibers. Dalton, a small city located in rural northwest Georgia, would not seem to have any advantages in carpet production. In fact, the location of the carpet industry in Dalton was a historical accident. Explain how countries gain from international trade. 8.3 LEARNING OBJECTIVE

21. 21 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Comparative Advantage Over Time: The Rise and Falland Rise of the U.S. Consumer Electronics Industry How Countries Gain from International Trade Once a country has lost its comparative advantage in producing a good, its income will be higher and its economy will be more efficient if it switches from producing the good to importing it. Explain how countries gain from international trade. 8.3 LEARNING OBJECTIVE

22. 22 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Government Policies That Restrict International Trade Analyze the economic effects of government policies that restrict international trade. 8.4 LEARNING OBJECTIVE Free trade Trade between countries that is without government restrictions. FIGURE 8-4 The U.S. Market for Ethanol under Autarky This figure shows the market for ethanol in the United States, assuming autarky, where the United States does not trade with other countries. The equilibrium price of ethanol is $2.00 per gallon, and the equilibrium quantity is 6.0 billion gallons per year. The blue area represents consumer surplus, and the red area represents producer surplus.

23. 23 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Government Policies That Restrict International Trade FIGURE 8-5 The Effect of Imports on the U.S. Ethanol Market When imports are allowed into the United States, the price of ethanol falls from $2.00 to $1.00. U.S. consumers increase their purchases from 6.0 billion gallons to 9.0 billion gallons. Equilibrium moves from point F to point G. U.S. producers reduce the quantity of ethanol they supply from 6.0 billion gallons to 3.0 billion gallons. Imports equal 6.0 billion gallons, which is the difference between U.S. consumption and U.S. production. Consumer surplus equals the areas A, B, C, and D. Producer surplus equals the area E. Analyze the economic effects of government policies that restrict international trade. 8.4 LEARNING OBJECTIVE

24. 24 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Government Policies That Restrict International Trade FIGURE 8-6 The Effects of a Tariff on Ethanol Without a tariff on ethanol, U.S. producers will sell 3.0 billion gallons of ethanol, U.S. consumers will purchase 9.0 billion gallons, and imports will be 6.0 billion gallons. The U.S. price will equal the world price of $1.00 per gallon. The $0.50-per-gallon tariff raises the price of ethanol in the United States to $1.50 per gallon, and U.S. producers increase the quantity they supply to 4.5 billion gallons. U.S. consumers reduce their purchases to 7.5 billion gallons. Equilibrium moves from point G to point H. The ethanol tariff causes a loss of consumer surplus equal to the area A + C + T + D. The area A is the increase in producer surplus due to the higher price. The area T is the governments tariff revenue. The areas C and D represent deadweight loss. Tariffs Analyze the economic effects of government policies that restrict international trade. 8.4 LEARNING OBJECTIVE

25. 25 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Government Policies That Restrict International Trade Quotas and Voluntary Export Restraints Quota A numerical limit imposed by a government on the quantity of a good that can be imported into the country. Voluntary export restraint (VER) An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country. Analyze the economic effects of government policies that restrict international trade. 8.4 LEARNING OBJECTIVE

26. 26 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Government Policies That Restrict International Trade Quotas and Voluntary Export Restraints FIGURE 8-7 The Economic Effect of the U.S. Sugar Quota Without a sugar quota, U.S. sugar producers would have sold 3.5 billion pounds of sugar, U.S. consumers would have purchased 21.7 billion pounds of sugar, and imports would have been 18.2 billion pounds. The U.S. price would have equaled the world price of $0.16 per pound. Because the sugar quota limits imports to 3.6 billion pounds (the bracket in the graph), the price of sugar in the United States rises to $0.33 per pound, and U.S. producers increase the quantity of sugar they supply to 15.2 billion pounds. U.S. consumers reduce their sugar purchases to 18.8 billion pounds. Equilibrium moves from point E to point F. The sugar quota causes a loss of consumer surplus equal to the area A + B + C + D. The area A is the gain to U.S. sugar producers. The area B is the gain to foreign sugar producers. The areas C and D represent deadweight loss. The total loss to U.S. consumers in 2008 was $3.44 billion. Analyze the economic effects of government policies that restrict international trade. 8.4 LEARNING OBJECTIVE

27. 27 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Government Policies That Restrict International Trade Measuring the Economic Effect of the Sugar Quota We can use the concepts of consumer surplus, producer surplus, and deadweight loss to measure the economic impact of the sugar quota. Analyze the economic effects of government policies that restrict international trade. 8.4 LEARNING OBJECTIVE

28. 28 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Solved Problem 8-4 Measuring the Economic Effect of a Quota YOUR TURN: For more practice, do related problem 4.14 at the end of this chapter. WITHOUT QUOTAWITH QUOTA World price of apples U.S. price of apples Quantity supplied by U.S. firms Quantity demanded by U.S. consumers Quantity imported Area of consumer surplus Area of domestic producer surplus Area of deadweight loss $10 6 million boxes 16 million boxes 10 million boxes A+B+C+D+E+F G No deadweight loss $10 $12 10 million boxes 14 million boxes 4 million boxes A+B G+C D+F Analyze the economic effects of government policies that restrict international trade. 8.4 LEARNING OBJECTIVE

29. 29 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Government Policies That Restrict International Trade The High Cost of Preserving Jobs with Tariffs and Quotas PRODUCT NUMBER OF JOBS SAVED COST TO CONSUMERS PER YEAR FOR EACH JOB SAVED Benzenoid chemicals Luggage Softwood lumber Dairy products Frozen orange juice Ball bearings Machine tools Women's handbags Canned tuna 216 226 605 2,378 609 146 1,556 773 390 $1,376,435 1,285,078 1,044,271 685,323 635,103 603,368 479,452 263,535 257,640 TABLE 8-5 Preserving U.S. Jobs with Tariffs and Quotas Is Expensive Analyze the economic effects of government policies that restrict international trade. 8.4 LEARNING OBJECTIVE

30. 30 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Government Policies That Restrict International Trade The High Cost of Preserving Jobs with Tariffs and Quotas TABLE 8-6 Preserving Japanese Jobs with Tariffs and Quotas Is Also Expensive PRODUCT COST TO CONSUMERS PER YEAR FOR EACH JOB SAVED Rice Natural gas Gasoline Paper Beef, pork, and poultry Cosmetics Radio and television sets $51,233,000 27,987,000 6,329,000 3,813,000 1,933,000 1,778,000 915,000 Analyze the economic effects of government policies that restrict international trade. 8.4 LEARNING OBJECTIVE

31. 31 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Government Policies That Restrict International Trade Gains from Unilateral Elimination of Tariffs and Quotas Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminate their tariffs and quotas in exchange. Other Barriers to Trade In addition to tariffs and quotas, governments sometimes erect other barriers to trade. Analyze the economic effects of government policies that restrict international trade. 8.4 LEARNING OBJECTIVE

32. 32 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The Arguments Over Trade Policies and Globalization Evaluate the arguments over trade policies and globalization. 8.5 LEARNING OBJECTIVE Why Do Some People Oppose the World Trade Organization? World Trade Organization (WTO) An international organization that oversees international trade agreements. Some people believe that free trade and foreign investment destroy the distinctive cultures of many countries. Many governments have resisted globalization proposals. Globalization The process of countries becoming more open to foreign trade and investment. Anti-Globalization

33. 33 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The Unintended Consequences of Banning Goods Made with Child Labor Making the Connection YOUR TURN: Test your understanding by doing related problem 5.5 at the end of this chapter. Would eliminating child labor, such as stitching soccer balls, improve the quality of childrens lives? Of the array of possible employment in which impoverished children might engage, soccer ball stitching is probably one of the most benign.... [In Pakistan] children generally work alongside other family members in the home or in small workshops....Nor are the children exposed to toxic chemicals, hazardous tools or brutal working conditions. Rather, the only serious criticism concerns the length of the typical child stitchers work-day and the impact on formal education. Evaluate the arguments over trade policies and globalization. 8.5 LEARNING OBJECTIVE

34. 34 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The Arguments Over Trade Policies and Globalization Why Do Some People Oppose the World Trade Organization? Protectionism The use of trade barriers to shield domestic firms from foreign competition. Old-Fashioned Protectionism Evaluate the arguments over trade policies and globalization. 8.5 LEARNING OBJECTIVE

35. 35 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The Arguments Over Trade Policies and Globalization Why Do Some People Oppose the World Trade Organization? Old-Fashioned Protectionism Saving jobs. Supporters of protectionism argue that free trade reduces employment by driving domestic firms out of business. Protecting high wages. Some people worry that firms in high-income countries will have to start paying much lower wages to compete with firms in developing countries. Protecting infant industries. It is possible that firms in a country may have a comparative advantage in producing a good, but because the country begins production of the good later than other countries, its firms initially have higher costs. Protecting national security. As already discussed, a country should not rely on other countries for goods that are critical to its military defense. Protectionism is usually justified on the basis of one of the following arguments: Evaluate the arguments over trade policies and globalization. 8.5 LEARNING OBJECTIVE

36. 36 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The Arguments Over Trade Policies and Globalization Dumping Dumping Selling a product for a price below its cost of production. Positive analysis concerns what is. Normative analysis concerns what ought to be. Positive versus Normative Analysis (Once Again) Evaluate the arguments over trade policies and globalization. 8.5 LEARNING OBJECTIVE

37. 37 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The Arguments Over Trade Policies and Globalization Positive versus Normative Analysis (Once Again) The success of industries in getting the government to erect barriers to foreign competition depends partly on some members of the public knowing full well the costs of trade barriers but supporting them anyway. However, two other factors are also at work: 1.The costs tariffs and quotas impose on consumers are large in total but relatively small per person. 2.The jobs lost to foreign competition are easy to identify, but the jobs created by foreign trade are less easy to identify. Evaluate the arguments over trade policies and globalization. 8.5 LEARNING OBJECTIVE

38. 38 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade The Obama Administration Develops a Trade Policy Making the Connection YOUR TURN: Test your understanding by doing related problems 5.7 and 5.8 at the end of this chapter. Would a free trade agreement with Colombia benefit the United States? Obama pledged that as president, he would use trade agreements to spread good labor and environmental standards around the world. Evaluate the arguments over trade policies and globalization. 8.5 LEARNING OBJECTIVE

39. 39 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Caterpillar and Other Exporters Oppose Buy American Provision Buy American Clause Stirs Up Controversy >> AN INSIDE LOOK at Policy The effect of the Buy American provision on the steel market in the United States.

40. 40 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Absolute advantage Autarky Comparative advantage Dumping Exports External economies Free trade Globalization Imports Opportunity cost Protectionism Quota Tariff Terms of trade Voluntary export restraint (VER) World Trade Organization (WTO) KEY TERMS

41. 41 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Appendix Multinational Firms Understand why firms operate in more than one country. LEARNING OBJECTIVE Multinational enterprise A firm that conducts operations in more than one country.

42. 42 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Appendix Multinational Firms Understand why firms operate in more than one country. LEARNING OBJECTIVE TABLE 8A-1 Top 25 Multinational Corporations, 2009

43. 43 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Appendix Multinational Firms A Brief History of Multinational Enterprises Foreign direct investment The purchase or building by a domestic firm of a facility in a foreign country. Foreign portfolio investment The purchase by an individual or a firm of stocks or bonds issued in another country. Understand why firms operate in more than one country. LEARNING OBJECTIVE In the early twentieth century, most U.S. firms expanded abroad through foreign direct investment because the stock and bond markets in other countries were often too poorly developed to make foreign portfolio investment practical.

44. 44 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Appendix Multinational Firms Strategic Factors in Moving from Domestic to Foreign Markets Firms might expect to increase their profits through overseas operations for five main reasons: To avoid tariffs or the threat of tariffs. To gain access to raw materials. To gain access to low-cost labor. To minimize exchange-rate risk. To respond to industry competition. Understand why firms operate in more than one country. LEARNING OBJECTIVE

45. 45 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Have Multinational Corporations Reduced Employment and Lowered Wages in the United States? Making the Connection YOUR TURN: Test your understanding by doing related problem 8A.12 at the end of this appendix. Many U.S. jobs require technical training and pay higher wages. During the 1990s, some U.S. corporations responded to the greater economic openness of many poorer countries by relocating manufacturing operations to those countries. Understand why firms operate in more than one country. LEARNING OBJECTIVE

46. 46 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade Appendix Multinational Firms Challenges to U.S. Firms in Foreign Markets Expanding into foreign markets can often be quite difficult, and the additional costs incurred may end up being greater than the additional revenue gained. Competitive Advantages of U.S. Firms Some U.S. firms have successful foreign operations because of the strength of their brand names. A U.S. firms global competitive advantage changes over time. Understand why firms operate in more than one country. LEARNING OBJECTIVE

47. 47 of 47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall · Microeconomics · R. Glenn Hubbard, Anthony Patrick OBrien, 3e. Chapter 8: Comparative Advantage and the Gains from International Trade KEY TERMS Foreign direct investment Foreign portfolio investment Multinational enterprise