1. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 1 of 40 Tariff A tax imposed by a government on imports. The United States in the International Economy Learning Objective 8.1 Imports Goods and services bought domestically but produced in other countries. Exports Goods and services produced domestically but sold to other countries.

2. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 2 of 40 The United States in the International Economy Learning Objective 8.1 The Importance of Trade to the U.S. Economy FIGURE 8-1 International Trade is of Increasing Importance to the United States

3. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 3 of 40 The United States in the International Economy Learning Objective 8.1 FIGURE 8-3 International Trade as a Percentage of GDP U.S. International Trade in a World Context

4. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 4 of 40 The United States in the International Economy Learning Objective 8.1 FIGURE 8-2 The Eight Leading Exporting Countries U.S. International Trade in a World Context

5. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 5 of 40 Learning Objective 8.1 How Expanding International Trade Has Helped Boeing Making the Connection Rapid growth of international trade spurred demand for the 747 because it has larger cargo capacity than other planes.

6. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 6 of 40 Absolute advantage The ability to produce more of a good or service than competitors when using the same amount of resources. 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. Comparative Advantage in International Trade

7. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 7 of 40 Comparative Advantage in International Trade An Example of Japanese Workers Being More Productive Than American Workers OPPORTUNITY COSTS CELL PHONESDIGITAL MUSIC PLAYERS JAPAN0.5 digital music player2 cell phones UNITED STATES2 digital music players0.5 cell phone OUTPUT PER HOUR OF WORK CELL PHONESDIGITAL MUSIC PLAYERS JAPAN126 UNITED STATES24

8. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 8 of 40 How Countries Gain from International Trade Learning Objective 8.3 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 JAPAN9,0001,500 UNITED STATES1,5001,000 Increasing Consumption through Trade Terms of trade The ratio at which a country can trade its exports for imports from other countries.

9. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 9 of 40 How Countries Gain from International Trade Learning Objective 8.3 Table 8-4 Increasing Consumption through Trade The Gains from Trade for Japan and the United States WITHOUT TRADE Production and Consumption CELL PHONES MP3 PLAYERS Japan9,0001,500 United States1,5001,000 WITH TRADE Production with TradeTradeConsumption with Trade CELL PHONES MP3 PLAYERS CELL PHONES MP3 PLAYERS CELL PHONES MP3 PLAYERS Japan 12,0000Export 1,500Import 1,50010,5001,500 United States 04,000Import 1,500Export 1,5001,5002,500 With trade, the United States and Japan specialize in the good they have a comparative advantage in producing......and export some of that good in exchange for the good the other country has a comparative advantage in producing. GAINS FROM TRADE Increased Consumption Japan1,500 Cell PhonesThe increased consumption made possible by trade represents the gains from trade. United States1,500 MP3 Players

10. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 10 of 40 Solved Problem 8-3 The Gains from Trade Learning Objective 8.3 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 TRADE TRADE CONSUMPTION WITH TRADE CLOTHWINECLOTHWINECLOTHWINE PORTUGAL0150,000Import 18,000Export 18,00018,000132,000 ENGLAND90,0000Export 18,000Import 18,00072,00018,000

11. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 11 of 40 Learning Objective 8.3 Climate and natural resources. Relative abundance of labor and capital. Technology. External economies. How Countries Gain from International Trade Where Does Comparative Advantage Come From? External economies Reductions in a firm’s costs that result from an increase in the size of an industry.

12. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 12 of 40 Learning Objective 8.3 Why Is Dalton, Georgia, the Carpet- Making Capital of the World? Making the Connection Because Catherine Evans Whitener started making bedspreads by hand in Dalton, Georgia, 100 years ago, a multibillion-dollar carpet industry is now located there.

13. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 13 of 40 Learning Objective 8.3 Don’t Let This Happen to YOU! Remember That Trade Creates Both Winners and Losers Not all goods and services are traded internationally. Production of most goods involves increasing opportunity costs. Tastes for products differ. How Countries Gain from International Trade Why Don’t We See Complete Specialization? Does Anyone Lose as a Result of International Trade?

14. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 14 of 40 Learning Objective 8.3 How Countries Gain from International Trade Comparative Advantage Over Time: The Rise and Fall— and Rise—of the U.S. Consumer Electronics Industry 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.

15. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 15 of 40 Learning Objective 8.4 Government Policies That Restrict International Trade Measuring the Economic Effect of Trade Restrictions We can use the concepts of consumer surplus, producer surplus, and deadweight loss to measure the economic impact of tariffs and quotas.

16. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 16 of 40 Learning Objective 8.4 Government Policies That Restrict International Trade Free trade Trade between countries that is without government restrictions. Figure 8-4 The U.S. Market for Ethanol under Autarky

17. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 17 of 40 Learning Objective 8.4 Government Policies That Restrict International Trade Figure 8-5 The Effect of Imports on the U.S. Ethanol Market

18. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 18 of 40 Learning Objective 8.4 Government Policies That Restrict International Trade Figure 8-6 The Effects of a Tariff on Ethanol Tariffs

19. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 19 of 40 Learning Objective 8.4 Government Policies That Restrict International Trade Quotas and Voluntary Export Restraints Quota A numeric 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 numeric limit on the quantity of a good that can be imported by one country from the other country.

20. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 20 of 40 Learning Objective 8.4 Government Policies That Restrict International Trade Quotas and Voluntary Export Restraints Figure 8-7 The Economic Effect of the U.S. Sugar Quota

21. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 21 of 40 Learning Objective 8.4 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

22. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 22 of 40 Learning Objective 8.4 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

23. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 23 of 40 Learning Objective 8.5 The Argument over Trade Policies and Globalization World Trade Organization (WTO) An international organization that oversees international trade agreements. Why Do Some People Oppose the World Trade Organization? Globalization The process of countries becoming more open to foreign trade and investment. Anti-Globalization Some people believe that free trade and foreign investment destroy the distinctive cultures of many countries. Many governments have resisted globalization proposals.

24. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 24 of 40 Learning Objective 8.5 The Unintended Consequences of Banning Goods Made with Child Labor Making the Connection Would eliminating child labor in developing countries be a good thing?

25. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 25 of 40 Learning Objective 8.5 The Argument 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 Saving jobs. Protecting high wages. Protecting infant industries. Protecting national security. Protectionism is usually justified on the basis of one of the following arguments:

26. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 26 of 40 Learning Objective 8.5 Has NAFTA Helped or Hurt the U.S. Economy? Making the Connection Despite resistance to NAFTA, time proved that the U.S. economy gained jobs.

27. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 27 of 40 Learning Objective 8.5 The Argument 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: 1The costs tariffs and quotas impose on consumers are large in total but relatively small per person. 2The jobs lost to foreign competition are easy to identify, but the jobs created by foreign trade are less easy to identify.

28. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 28 of 40 An Inside LOOK The United States and South Korea Reach a Trade Deal U.S. and South Korea Agree to Sweeping Trade Deal

29. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 29 of 40 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) K e y T e r m s

30. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 30 of 40 Multinational Firms Appendix Multinational enterprise A firm that conducts operations in more than one country. Table 8-5 Top 25 Multinational Corporations, 2007

31. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 31 of 40 Multinational Firms Appendix Table 8-5 Top 25 Multinational Corporations, 2007 (continued)

32. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 32 of 40 Multinational Firms Appendix 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.

33. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 33 of 40 Multinational Firms Appendix 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.

34. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 34 of 40 Appendix Have Multinational Corporations Reduced Employment and Lowered Wages in the United States? Making the Connection Many U.S. jobs require technical training.

35. Chapter 8: Comparative Advantage and the Gains from International Trade © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 35 of 40 Multinational Firms Appendix 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. firm’s global competitive advantage changes over time.