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37
International Trade
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Some Key Trade Facts
LO1
Principal U.S. exports include:
Principal U.S. imports include:
• Chemicals• Agricultural products• Consumer durables• Semiconductors• Aircraft
U.S. provides about 8.5% of world’s exports
• Petroleum• Automobiles• Metals• Household appliances• Computers
37-2
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Economic Basis for Trade
• Nations have different resource endowments
• Labor-intensive goods
• Land-intensive goods
• Capital-intensive goods
LO2 37-3
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• 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 beefLO2
Comparative Advantage
37-4
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Veg
etab
les
(To
ns
)
30
25
20
15
10
5
0
35
40
45
5 10 15 20
Beef (Tons)
Veg
etab
les
(To
ns
)
30
25
20
15
10
5
0
35
40
45
5 10 15 20 25 30
Beef (Tons)
(a) United States (b) Mexico
12
18 8
4
A
Z
Comparative Advantage
LO2 37-5
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Comparative Advantage
LO2 37-6
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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 37-7
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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 37-8
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Trade Barriers and Export Subsidies
• Tariffs
• Revenue tariff
• Protective tariff
• Import quota
• Nontariff barrier (NTB)
• Voluntary export restriction (VER)
• Export subsidy
LO4 37-9
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Economic Impact of Tariffs
• Direct effects
• Decline in consumption
• Increase in domestic production
• Decline in imports
• Tariff revenue
• Indirect effects
LO4 37-10
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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 37-11
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The Case for Protection
• Military self-sufficiency
• Diversification for stability
• Infant industry
• Protection against dumping
• Increased domestic employment
• Cheap foreign labor
LO5 37-12
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GATT
• Three principles:
• Equal, nondiscriminatory trade between member nations
• Reduction in tariffs
• Elimination of import quotas
LO5 37-13
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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
LO5 37-14
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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
LO5 37-15
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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
LO5 37-16