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INTERNATIONAL TRADE 37 C H A P T E R Export Partners Canada 13%, Mexico 8%, China 4%, Japan 3% Import Partners China 15.4%, Canada 11.6%, Mexico, 9.1%,

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Presentation on theme: "INTERNATIONAL TRADE 37 C H A P T E R Export Partners Canada 13%, Mexico 8%, China 4%, Japan 3% Import Partners China 15.4%, Canada 11.6%, Mexico, 9.1%,"— Presentation transcript:

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2 INTERNATIONAL TRADE 37 C H A P T E R

3 Export Partners Canada 13%, Mexico 8%, China 4%, Japan 3% Import Partners China 15.4%, Canada 11.6%, Mexico, 9.1%, Japan, 4.9%, Germany 3.7% $695.9 billion Trade Deficit in 2009 Export Goods & Services 16% of American GDP KEY FACTS ON TRADE

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5 United States Germany Japan France United Kingdom Canada Italy 0 2 4 6 8 10 12 GLOBAL PERSPECTIVE Shares of World Exports, Selected Nations, 1999 Source: World Trade Organization

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7 Source: WTO. Share of World Goods Exports, Leading Exporters, 1950-2008 The first decade of the 21st century have seen a significant shift in the share of global trade of the leading exporters (United States, Japan, Germany and China more recently). The enduring trend involving the relative decline of American exports has accelerated to the point that Germany became the world's leading exporter in 2003 with China climbing to the second rank in 2007. Japan's share has been declining for about 15 years and was overtaken in 2004 by China. However, it must be considered that many Japanese (and Korean) corporations have relocated in China parts of their production facilities, so some Chinese exports are embedded within Japanese supply chains. There is thus a convergence and an enduring stability of the share of the world's four leading exporters, hovering in the 30% of total exports range.

8 ECOMOMIC BASIS FOR TRADE Distribution of Economic Resources Different Technologies and/or Resources Goods are Differentiated as to Quality and other Nonprice Attributes Labor-Intensive Goods Land-Intensive Goods Capital-Intensive Goods

9 COMPARATIVE ADVANTAGE Two Isolated Nations Constant Costs Straight Line PPF’s Different Costs Different Technology and Resources in Each Nation Cost Ratio Self-Sufficiency Output Mix Trading According to Comparative Advantage Graphically...

10 PRODUCTION POSSIBILITIES A B Coffee (tons) 45 40 35 30 25 20 15 10 5 0 30 25 20 15 10 5 0 5 10 15 20 25 30 5 10 15 20 Wheat (tons) Curve For Each Country United StatesBrazil

11 Total output will be greatest when Each good is produced by the nation that has the lowest domestic opportunity cost for that good. U.S has comparative advantage in wheat Brazil has comparative advantage in coffee Principle of Comparative Advantage PRODUCTION POSSIBILITIES

12 Terms of Trade Gains From Trade Improved Options Principle of Comparative Advantage PRODUCTION POSSIBILITIES Trading Possibilities Line Graphically…

13 TRADING POSSIBILITIES LINES Coffee (tons) 45 40 35 30 25 20 15 10 5 0 30 25 20 15 10 5 0 5 10 15 20 25 30 5 10 15 20 A B Trading possibilities line Trading possibilities line Wheat (tons) The Gains from Trade United StatesBrazil

14 TRADING POSSIBILITIES LINES Coffee (tons) 45 40 35 30 25 20 15 10 5 0 30 25 20 15 10 5 0 5 10 15 20 25 30 5 10 15 20 A B Trading possibilities line Trading possibilities line A’ B’ Wheat (tons) The Gains from Trade United StatesBrazil

15 TRADING POSSIBILITIES LINES Coffee (tons) 45 40 35 30 25 20 15 10 5 0 30 25 20 15 10 5 0 5 10 15 20 25 30 5 10 15 20 A B Trading possibilities line Trading possibilities line A’ B’ Wheat (tons) The Gains from Trade United StatesBrazil The Case For Free Trade

16 U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand DdDd SdSd If the world price exceeds the U.S. price by 25 cents... $1.50 1.25 1.00.75.50.25 Price (per pound; U.S. dollars) 1005075125150 Quantity of Aluminum 10050 Price (per pound; U.S. dollars) $1.50 1.25 1.00.75.50.25 Quantity of Aluminum

17 EXPORTS = 50 U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $1.50 1.25 1.00.75.50.25 10050 DdDd Price (per pound; U.S. dollars) 1005075125150 SURPLUS = 50 $1.50 1.25 1.00.75.50.25 If the world price goes further up... SdSd Quantity of Aluminum

18 EXPORTS = 50 EXPORTS = 100 U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $1.50 1.25 1.00.75.50.25 10050 DdDd Price (per pound; U.S. dollars) 1005075125150 SURPLUS = 50 SURPLUS = 100 $1.50 1.25 1.00.75.50.25 If world prices fall below $1.00... SdSd U.S. export supply Quantity of Aluminum

19 SHORTAGE = 50 U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $1.50 1.25 1.00.75.50.25 10050 DdDd Price (per pound; U.S. dollars) 1005075125150 SURPLUS = 50 SURPLUS = 100 $1.50 1.25 1.00.75.50.25 SdSd EXPORTS = 50 EXPORTS = 100 IMPORTS = 50 U.S.exportsupply Quantity of Aluminum

20 SHORTAGE = 50 SHORTAGE = 100 U.S.EXPORT U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S.EXPORT U.S. EXPORT SUPPLY AND IMPORT DEMAND U.S. Domestic Aluminum Market U.S. Export Supply And Import Demand $1.50 1.25 1.00.75.50.25 10050 DdDd Price (per pound; U.S. dollars) 1005075125150 SURPLUS = 50 SURPLUS = 100 U.S. export supply EXPORTS = 50 EXPORTS = 100 IMPORTS = 50 IMPORTS = 100 U.S. import demand $1.50 1.25 1.00.75.50.25 SdSd Quantity of Aluminum

21 CANADIAN EXPORT SUPPLY AND IMPORT DEMAND CANADIAN EXPORT SUPPLY AND IMPORT DEMAND Canada’s Domestic Aluminum Market Canada’s Export Supply And Import Demand DdDd SHORTAGE = 50 $1.50 1.25 1.00.75.50.25 10050 Price (per pound; U.S. dollars) 1005075125150 SURPLUS = 100 Canadian export supply Canadian import demand $1.50 1.25 1.00.75.50.25 SdSd SURPLUS = 50 Quantity of Aluminum

22 EQUILIBRIUM WORLD PRICE AND QUANTITY OF EXPORTS & IMPORTS Price (per pound; U.S. dollars) U.S. export supply U.S. import demand Quantity of Aluminum Canadianexportsupply Canadian import demand 10050 $1.50 1.25 1.00.75.50.25 25.88 Equilibrium

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24 TRADE BARRIERS Tariffs - excise taxes on imported goods Revenue Tariff - provide Federal Government with revenue (usually on products not produced domestically) Protective Tariff - designed to shield domestic producers Import Quota - sets a maximum amount that may be imported Nontariff Barrier (NTB)- licensing, safety, government “red tape” Voluntary Export Restriction (VER)

25 ECONOMIC IMPACT OF TARIFFS Direct Effects Decline in ConsumptionDecline in Consumption Increased Domestic ProductionIncreased Domestic Production Decline in ImportsDecline in Imports Tariff RevenueTariff Revenue Direct Effects Decline in ConsumptionDecline in Consumption Increased Domestic ProductionIncreased Domestic Production Decline in ImportsDecline in Imports Tariff RevenueTariff Revenue Indirect Effects Promote inefficienciesPromote inefficiencies Decrease Aggregate demandDecrease Aggregate demand

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28 ECONOMIC IMPACT OF TARIFFS Economic Impact of Quotas  Revenue transferred to foreign producers Net Costs of Tariffs and Quotas  Price goes up to consumers Impact On Income Distribution  Burden disproportionately hits low incomes

29 THE CASE FOR PROTECTION Military Self-Sufficiency Increase Domestic Employment Job Creation From Imports Fallacy of Composition Retaliation Smoot-Hawley Act of 1930 Long-run feedbacks Diversification-For-Stability Infant-Industry Argument Strategic Trade Policy Protection-Against-Dumping Cheap Foreign Labor

30 World Trade Organization (WTO) Reductions in Tariffs Worldwide New Rules to Promote Trade in Services Reduction in Agricultural Subsidies Intellectual Property Protections Phasing Out Textile Quotas and Tariffs THE WORLD TRADE ORGANIZATION

31 World Trade Organization (WTO) Reductions in Tariffs Worldwide New Rules to Promote Trade in Services Reduction in Agricultural Subsidies Intellectual Property Protections Phasing Out Textile Quotas and Tariffs THE WORLD TRADE ORGANIZATION Chapter Conclusions

32 export supply curve import demand curve equilibrium world price tariffs revenue tariff protective tariff import quota nontariff barrier (NTB) voluntary export restriction (VER) strategic trade policy dumping World Trade Organization (WTO) labor-intensive goods land-intensive goods capital-intensive goods cost ratio principle of comparative advantage terms of trade trading possibilities line gains from trade world price domestic price ENDBACK Copyright McGraw-Hill/Irwin 2002

33 EXCHANGE RATES THE BALANCE OF PAYMENTS, AND TRADE DEFICITS Chapter 38 Coming soon...


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