1. International Trade Chapter 38 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 38-2 Some Key Trade Facts U.S. trade deficit in goods $735 billion in 2012 U.S. trade surplus in services $196 billion in 2012 Canada largest U.S. trade partner Trade deficit with China $315 billion in 2012 Exports are 14% U.S. output Dependence on oil LO1

3. 38-3 Some Key Trade Facts Principal U.S. exports include: Chemicals Agricultural products Consumer durables Semiconductors Aircraft U.S. provides about 8.1% of world’s exports LO1

4. 38-4 Some Key Trade Facts Principal U.S. imports include: Petroleum Automobiles Metals Household appliances Computers LO1

5. 38-5 Some Key Trade Facts LO1

6. 38-6 Some Key Trade Facts LO1

7. 38-7 Economic Basis for Trade Nations have different resource endowments Labor-intensive goods Land-intensive goods Capital-intensive goods LO2

8. 38-8 Assumptions Two nations Same size labor force Constant costs in each country Different costs between countries U.S. absolute advantage in both Opportunity cost ratio Slope of the curve Vegetables sacrificed per ton of beef Comparative Advantage LO2

9. 38-9 Comparative Advantage (a) United States (b) Mexico Vegetables (Tons) 30 25 20 15 10 5 0 35 40 45 5101520 Beef (Tons) Vegetables (Tons) 30 25 20 15 10 5 0 35 40 45 51015202530 Beef (Tons) 12 18 8 4 A Z LO2

10. 38-10 Comparative Advantage Self-sufficiency output mix Specialization and trade Produce the good with the lowest domestic opportunity cost Opportunity cost of 1 ton of beef: 1 pound of vegetables in U.S. 2 pounds of vegetables in Mexico

11. 38-11 Comparative Advantage LO2

12. 38-12 Comparative Advantage Terms of trade U.S. 1V = 1B U.S. will sell 1B for more than 1V Mexico 2V = 1B Mexico will pay less than 2V for 1B Settle between the two Depends on supply/demand factors Assume 1B = 1.5V LO2

13. 38-13 Comparative Advantage Gains from trade Trading possibilities line Slope equals terms of trade Improved options Complete specialization More of both goods More efficient resource allocation LO2

14. 38-14 Gains from Trade (a) United States (b) Mexico Vegetables (Tons) 30 25 20 15 10 5 0 35 40 45 5101520 Beef (Tons) Vegetables (Tons) 30 25 20 15 10 5 0 35 40 45 51015202530 Beef (Tons) 12 18 8 4 A Z A’ Z’ V V’ W v b b’ Trading Possibilities Line Trading Possibilities Line B LO2

15. 38-15 Comparative Advantage Trade with increasing costs Concave production curve Resources not perfectly substitutable Incomplete specialization Case for free trade Promote efficiency Promote competition LO2

16. 38-16 Supply and Demand Analysis World price Domestic price with no trade World price > domestic price Export surplus Export supply curve World price < domestic price Import shortage Import supply curve LO3

17. 38-17 1.50 1.25 1.00.75.50 0 50100 Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars 1.50 1.25 1.00.75.50 0 5075100125150 Quantity of Aluminum (Millions of Pounds) Supply and Demand Analysis (a) U.S. Domestic Aluminum Market (b) U.S. Export Supply and Import Demand DdDd SdSd U.S. Export Supply U.S. Import Demand a b c x y Surplus = 50 Surplus = 100 Shortage = 50 Shortage = 100 LO3

18. 38-18 Price (Per Pound; U.S. Dollars 1.50 1.25 1.00.75.50 0 5075100125150 Quantity of Aluminum (Millions of Pounds) 1.50 1.25 1.00.75.50 0 50100 Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars (a) Canada’s Domestic Aluminum Market (b) Canada’s Export Supply and Import Demand DdDd SdSd Canadian Export Supply Canadian Import Demand q r s t Surplus = 50 Surplus = 100 Shortage = 50 Supply and Demand Analysis LO3

19. 38-19 International Equilibrium 1.00.75.88 0 50100 Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars Import demand = Export supply Canadian Export Supply e U.S. Export Supply U.S. Import Demand Equilibrium Canadian Import Demand LO3

20. 38-20 Trade Barriers and Export Subsidies Tariffs Revenue tariff Protective tariff Import quota Nontariff barrier (NTB) Voluntary export restriction (VER) Export subsidy LO4

21. 38-21 Economic Impact of Tariffs Direct effects Decline in consumption Increase in domestic production Decline in imports Tariff revenue Indirect effects LO4

22. 38-22 Economic Impact of Quotas Decline in consumption Increase in domestic production Decline in imports Quotas do not provide for any government revenue but instead transfer it to foreign producers LO4

23. 38-23 Economic Effects of Tariff/Quota Quantity Price 0 DdDd SdSd PdPd q S d + Q PtPt PwPw a bcd LO4

24. 38-24 The Case for Protection Military self-sufficiency Diversification for stability Infant industry Protection against dumping Increased domestic employment Cheap foreign labor LO5

25. 38-25 Multilateral Trade Agreements General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) European Union (EU) North American Free Trade Agreement (NAFTA) LO6

26. 38-26 GATT Three principles: Equal, nondiscriminatory trade between member nations Reduction in tariffs Elimination of import quotas LO6

27. 38-27 WTO Established by Uruguay Round of GATT 153 member nations in 2010 Oversees trade agreements and rules on disputes Critics argue that it may allow nations to circumvent environmental and worker- protection laws LO6

28. 38-28 European Union Initiated in 1958 as Common Market Abolished tariffs and import quotas between member nations Established common tariff with nations outside the EU Created Euro Zone with one currency LO6

29. 38-29 NAFTA Agreement between U.S., Canada, and Mexico Established a free trade zone between the countries Trade has increased in all countries Enhanced standard of living LO6

30. 38-30 Trade Adjustment and Offshoring Trade Adjustment Assistance Act Designed to help individuals hurt by international trade Offshoring of jobs Shifting of work previously done by American workers to workers abroad LO6

31. 38-31 Petition of the Candlemakers Petition of candlemakers asking for protection from natural light producers such as the sun Tongue-in-cheek argument supporting the idea of free trade