1. Chapter 7: Global Markets in Action
Explain how international trade affects markets
Identify gains from trade, winners, and losers
Explain effects of trade barriers
Tariffs
Quotas
Consider arguments for/against protectionism.

2. How Global Markets Work
International Trade in 2008
global exports and imports were $35 trillion, more than half the value of global production.
total U.S exports were $1.8 trillion, 13% of U.S. GDP.
total U.S. imports were $2.5 trillion, 18% of U.S. GDP.

3. How Global Markets Work
What Drives International Trade?
The fundamental force that generates trade between nations is comparative advantage.
The basis for comparative trade is divergent opportunity costs between countries.

4. How Global Markets Work
Suppose that the opportunity cost of producing a T-shirt is lower in China than in the U.S.
China has a comparative advantage in producing T-shirts.
Suppose the opportunity cost of producing an airplane is lower in the U.S. than in China
the U.S. has a comparative advantage in producing airplanes.
Both countries can reap gains from trade by specializing in the production of the good at which they have a comparative advantage and then trading.
Both countries can gain from trade.

5. How Global Markets Work: Imports
U.S. demand and U.S. supply with no international trade.
The price of a T-shirt in U.S. is $8.
U.S. firms produce 40 million T-shirts a year and U.S. consumers buy 40 million T-shirts a year.

6. How Global Markets Work: Imports
Because U.S. does not have comparative advantage in t-shirts, world price < U.S. price without trade.
With trade allowed,
price of t-shirts drops to $5.
U.S. production of t-shirts drops
U.S. consmption of t-shirts rises
Imports make up difference between consumption and production in U.S.

7. How Global Markets Work: Exports
Without trade allowed, the price of an airplane in U.S. is at $100 million.
Boeing produces 400 airplanes a year and U.S. airlines buy 400 a year.

8. How Global Markets Work: Exports
Because U.S. has comparative advantage in planes, world price> U.S. price without trade allowed.
Allowing trades causes:
the price of an airplane to rise to world price of $150 million.
U.S. production increases
U.S. consumption decreases
exports of airplanes

9. Winners, Losers, and the Net Gain from Trade
International trade lowers the price of an imported good
Consumers of imported good are better off
Sellers of imported good are worse off
International trade raises the price of an exported good
Consumers of exported good are worse off
Sellers of exported good are better off
On net, is society better off with free trade?

10. Winners and Losers with Imports
Consumers surplus increases by B+D
Producers surplus decreases by B
On net, society better off by D

11. Winners and Losers with Exports
consumers surplus decreases by B
Producers surplus increases by B+D
On net, society better off by D

12. International Trade Restrictions
Governments restrict international trade to protect domestic producers from competition.
Governments use four sets of tools:
Tariffs
Import quotas
Other import barriers
Export subsidies

13. International Trade Restrictions
Tariffs
a tax on a good that is imposed by the importing country when an imported good crosses its international boundary.
For example, , the government of India imposes a 100 percent tariff on wine imported from the United States.
So when an Indian wine merchant imports a $10 bottle of Ontario wine, he pays the Indian government $10 import duty.

14. Effect of a $2 tariff on T-shirts
The tariff of $2 raises the price in the United States to $7.
U.S. imports decrease to 10 million a year.
U.S. government collects the tax revenue of $20 million a year.

16. International Trade Restrictions
Efffect of tariff:
Consumer surplus decreases (B+C+D+E)
Producer surplus increases (B)
Tariff revenue generated (D)
Loss to consumers exceeds gains to producer and government (tariff revenue)
On net, society is “worse off” by deadweight loss (C + E)

17. International Trade Restrictions
Import Quotas
a restriction that limits the maximum quantity of a good that may be imported in a given period.
For example, the United States imposes import quotas on food products such as sugar and bananas and manufactured goods such as textiles and paper.

19. International Trade Restrictions
The import quota raises the price of a T-shirt to $7 and decreases imports.
Area B is transferred from consumer surplus to producer surplus.
Importers’ profit is the sum of the two areas D.
The area C + E is the loss of total surplus—a deadweight loss created by the quota.

20. International Trade Restrictions
Other Import Barriers
Thousands of detailed health, safety, and other regulations restrict international trade.
Export Subsidies
a payment made by the government to a domestic producer of an exported good.
Export subsidies bring gains to domestic producers, but result in overproduction in the domestic economy and underproduction in the rest of the world and so create a deadweight loss.

21. Arguments for Protectionism
The Infant-Industry Argument
it is necessary to protect a new industry from import competition to enable it to grow into a mature industry that can compete in world markets.
This argument is based on the concept of dynamic competitive advantage, which can arise from learning-by-doing.
Learning-by-doing is a powerful engine of productivity growth, but this fact does not justify protection.

22. Arguments for Protectionism
The Dumping Argument
Dumping occurs when foreign a firm sells its exports at a lower price than its cost of production.
This argument does not justify protection because
It is virtually impossible to determine a firm’s costs.
Hard to think of a global monopoly, so even if all domestic firms are driven out, alternatives would still exist.
If the market is truly a global monopoly, better to regulate it rather than restrict trade.

23. Arguments for Protectionism
Other common arguments for protection are that it
Saves jobs
But costs jobs too.
Allows us to compete with cheap foreign labor.
But cheaper labor is less productive
Penalizes lax environmental standards.
But improved incomes tend to improve environmental standards
Prevents rich countries from exploiting developing countries.
What is “exploitation”?
Free trade will increase wages of workers in developing countries.

24. The Case Against Protection
Why is trade restricted?
Rent seeking: lobbying activities to collect “rents” from trade protection.
Widely dispersed costs(consumers)
Concentrated benefits (producers)
Lobbying is done by beneficiaries, not losers.

25. The Case Against Protection
The gain from free trade for any one person is too small for that person to spend much time or money on a political organization to lobby for free trade.
Each group weighs benefits against costs and chooses the best action for themselves.
But the group against free trade will undertake more political lobbying than will the group for free trade.