More on trade issues

1
More on trade issues

• Today Review of Test 1
• Finishing comparative advantage
• Introducing international trade

2
Who is this?

• Come to class to find out
• We will find out why he has made significant
  contributions to trade theory

3
Comparative advantage

• We have done the basics of comparative advantage
• Today
• We apply these principles, including to
  international trade

4
Today

• Comparative advantage and specialization
• An introduction to trade
• Addressing concerns about trade

5
Example
6
Drop units to save space

• Notice that Greg has absolute advantage in
  producing both pizzas and salads

• However, we will see that each person has a
  comparative advantage in producing one of the
  goods

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Comparative advantage

• Before we can determine comparative advantage, we
  must ask about each person how much of ____ must
  I give up in order to produce an additional
  ____?
• In other words, we need to determine the
  opportunity cost of making one more pizza or one
  more salad for both Greg and David

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Recall this table
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Opportunity cost table

• Note that the two numbers in each row are
  mathematical inverses of each other

10
Comparative advantage

• To find comparative advantage for each person,
  find the lowest number in each column

11
Comparative advantage

• David has comparative advantage in cooking pizzas
• Greg has comparative advantage in making salads

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Some things to note

• Absolute advantage
• The same person could have absolute advantage in
  everything
• Comparative advantage in a two-person, two-good
  economy
• Each person will almost always have comparative
  advantage in exactly one of the two goods

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From Greg and David to a big economy

• To produce an efficient point in an economy, each
  good needs to be produced with lowest opportunity
  cost

All units in this graph in millions
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From Greg and David to a big economy

• Notice that opportunity cost of pizzas increases
  from A to C
• Opportunity cost increases as more is produced

All units in this graph in millions
15
Changes in a production possibilities curve

• Some factors that can shift a production
  possibilities curve
• Change in population
• War
• Investment in buildings, machines, and other
  forms of capital
• Research and development in technology

16
From comparative advantage to trade

• Recall that Greg had comparative advantage at
  making salads, while Davids was making pizzas
• Greg could make more salads than he wants to eat
  and trade them for pizzas from David
• Both can be made better off with trade

17
International trade

• In the real world, trade is more complex than
  simple two-good economies
• When trade becomes more open between countries,
  there are typically millions of winners and often
  only thousands of losers
• Prices go down for goods on average
• The few displaced workers must find an alternate
  form of work, typically at a lower wage

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Addressing concerns about trade

• A majority of Americans, including 60 percent of
  Republicans, now believe free trade is bad for
  the U.S. economy, according to recent NBC
  News-Wall Street Journal polls.
• (Source Trade jitters, anti-China sentiment
  rouse US voters, Reuters, Nov. 14, 2007)
• Why do so many Americans have this opinion about
  trade?

19
Trade has costs and benefits

• When another country can produce goods lower than
  in the United States, two things happen
• Jobs are lost in the United States
• Consumers pay lower prices for the good that is
  now imported
• The news media usually focuses on the jobs issue
  more than about prices

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Why is media coverage skewed?

• Any job lost seriously deteriorates the quality
  of life of an individual
• Most people dont care to read headlines
  advertising The price of rice goes down by two
  cents per pound
• However, small gains on many products lead to
  substantial increases in the purchasing power of
  the dollar

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Suppose there is protectionism elsewhere

• The United States is a leading exporter of fresh
  fruit (see on-line reading list for source)
• Suppose that other countries outlawed the import
  of fresh fruit
• US jobs lost
• Decrease in price of fruit in the US
• Increase in the price of fruit in other countries

22
Protectionist policies

• Suppose that protectionist policies were
  implemented
• Also suppose that these policies lead to the
  price of goods on average increasing by 10 to 20
  percent
• Would you be in favor of this?

23
Another issue Lead in toys

• Recently, many toys manufactured in China have
  been recalled due to unsafe levels of lead
• This has raised concerns about the viability of
  toy exports
• China will stop exporting toys if the world does
  not view the toys as safe enough, given the price

24
Monitoring is costly

• Monitoring toys for lead is costly, adding to the
  cost of toys purchased
• However, testing costs may be small relative to
  the additional revenues that can be generated if
  the delivery of safe toys can be guaranteed

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Another example American cars

• Over the last 30 years, American cars have often
  been looked at as inferior compared to some
  foreign models
• With competition from trade, domestic car
  producers must keep costs down and quality up in
  order to successfully sell cars in the domestic
  market
• The same thing goes for foreign toys
• If quality control standards are not maintained
  abroad, people will buy their toys domestically

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Trade issues

• There are many other issues that are related to
  trade
• If you would like an in-depth analysis of trade,
  you can enroll in a class that deals with trade
• Wednesday, we will talk about the basic issues of
  trade, and who the winners and losers are

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International trade

• We will examine more about international trade in
  the next lecture
• Next lecture More on the mathematical analysis
  of international trade
• Look at lecture slides (no new reading)
• Think about how trade benefits your everyday life
• Example You could speculate about the price of
  gas if OPEC countries stopped producing oil