Lecture Issues in economics today - Chapter 14

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When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps.

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Nội dung Text: Lecture Issues in economics today - Chapter 14

Chapter 14 INTERNATIONAL TRADE: DOES IT JEOPARDIZE AMERICAN JOBS? McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Chapter Outline • WHAT WE TRADE AND WITH WHOM • THE BENEFITS FROM TRADE • BARRIERS TO TRADE • TRADE AS A DIPLOMATIC WEAPON McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
P e rc e n t o f G D P Exports and Imp As a Percentage of GD 14 12 10 Year 8 6 Exports/G 4 2 1960 1970 1980 1990 2000 Year McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
What We Trade: Exports (2000) Good Billions of Dollars of Exports Chemicals 80.3 Food and Agricultural 54.2 Products Computers 196.2 Airplanes and Parts 53.5 Motor Vehicles 79.7 Services 293.5 Total 1,065.7 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
What We Trade: Imports (2000) Good Billions of Dollars of Imports Computers and 164.9 Semiconductors Petroleum 25.5 Chemicals 71.9 Audio and Video 29.0 Equipment. Motor Vehicles 179.7 Services 217.0 Total 1,441.4 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
With Whom We Trade Country Exports in Imports in Balance billions billions Canada 178.8 229.2 -50.4 Mexico 111.7 135.9 -24.2 Japan 65.2 146.7 -81.5 China 16.3 100.1 -83.8 Mid East 19.0 38.9 -19.9 Other Asia 119.0 199.0 -80.0 W. Europe 181.3 277.3 -96.0 Africa 11.0 27.6 -17.6 World 782.4 1216.7 -434.3 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Comparative and Absolute Advantage • Absolute Advantage: the ability to produce a good better, faster, or more quickly than a competitor • Comparative Advantage: the ability to produce a good at a lower opportunity cost of the resources used McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
The Benefits of Trade: When Comparative and Absolute Advantage are the same Suppose there are two countries, Germany and Italy, and two goods, beer and sausage, and the production per unit of labor is shown in the table below. Beer Sausage Germany 2 1 Italy 1 2 Clearly, there are benefits from trade. If the Germans focus on beer production and the Italians focus on sausage production and they trade with one another more beer and more sausage is available to both countries. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
The Benefits of Trade: When Comparative and Absolute Advantage are Not the same Now suppose the Germans are better at producing both goods. The Germans have an absolute advantage in both but a comparative advantage in only beer. Beer Sausage Germany 2 3 Italy 1 2 There are still benefits from trade. If the Germans focus on beer production and the Italians focus on sausage production and they trade with one another more beer and more sausage is available to both countries. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Terms-of-trade • The amount of a good one country must give up in order to obtain another good from the other country, usually expressed as a ratio. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Using Production Possibilities Frontiers Italy Germany Beer Beer Production Possibilities Frontier Production Possibilities Frontier Sausage Sausage McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Consumption Possibilities Frontier with Trade Beer Consumption Possibilities Frontier Sausage McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Reasons For Limiting Trade That Many Economists Support • National Security • National Identity – Both of the above can be overstated easily. • Environmental Concerns • Child-Labor Concerns McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Reasons for Limiting Trade that Most Economists Do Not Support • To protect industries from competition – To temporarily aid an industry that is just emerging. – To protect an industry from competition that is dumping (the exporting of goods below cost so as to drive competitors out- of-business) its products in the US. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Methods of Limiting Trade • Tariffs: a tax on imports • Quotas: a legal restriction on the amount of a good coming into the country • Non-tariff barriers: barriers to trade that result from regulatory actions McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Tariffs vs. Quotas P S’ S Plimit A F } Tariff Limiting trade with a quota P* E Limiting trade with a tariff C A tariff raises tax revenue and B a quota does not. D Qlimit Q* Q/t McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Costs of Protection • Whether there is a quota or a tariff there is deadweight loss. This means that the gainers (the people who keep their jobs) gain less than the losers (the people who have to pay higher prices) lose. • The average cost per job saved via trade barriers is estimated to be $169,000 per year. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Trade as a Diplomatic Weapon • Trade sanctions have failed – To get Castro out of Cuba – To get Iran to release our hostages in 1979-1980. – To get the Soviet Union out of Afghanistan. – To get Iraq out of Kuwait in 1990. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.