International Trade

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International Trade
What is an export?
What is an Import?
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How much is traded?
Year Exports Imports Difference
1970 57.9 55.8 ____
1980 280.8 293.8 ____
1990 552.4 629.7 ____
1995 811.9 902.6 ____
2000 1093.2 1475.3 ____
2005 1035.1 2027.8 ____
2010 1839.8 2356.7 ____
2011 2087.6 2665.8 ____
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What is traded?
Exports 1985 2010
Foods, feeds, beverages
11.0 8.4
Industrial supplies
26.7 30.6
Capital goods
33.8 34.9
Automotive
10.5 8.8
Non-Food consumer goods
5.8 13.0
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What is traded?
Imports 1985 2010
Foods, feeds, beverages
6.5 4.8
Industrial supplies
33.8 31.5
Capital goods
19.3 23.5
Automotive
19.9 11.8
Non-Food consumer goods
20.3 25.3
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Who do we trade with?
Partner Exports
Partner Imports
Canada Mexico China Japan England Germany S.
Korea Brazil Netherlands Hong Kong
China Canada Mexico Japan Germany S.
Korea England Saudi Arabia Venezuela Taiwan
19.0 13.3 7.0 4.5 3.8 3.3 2.9 3.2 2.5 2.1
17.4 14.3 11.9 5.8 4.5 2.6 2.3 2.2 2.0 1.9
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Why do we trade?
Specialization
Comparative Advantage
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Comparative Advantage
Areas that have an advantage in production of a
good?
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Production Possibilities
Bonsai
Areca

• Guns Butter
• 0
• 2
• 4
• 0 6

• Guns Butter
• 0
• 12 1
• 2
• 3
• 0 4

Guns
Guns
Butter
Butter
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International Example
Production Possibilities - Mexico
Product A B C D E
Avocados 0 20 24 40 60
Soybeans 15 10 9 5 0
1 S __ A
1 A __ S
Production Possibilities - US
Product A B C D E
Avocados 0 30 33 60 90
Soybeans 30 20 19 10 0
1 S __ A
1 A __ S
US should produce?
Mexico should produce?
Terms of Trade? ___ A for ___ S
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Comparative Advantage
With one unit of resources
- China 2 tons of wheat or 4 tons of rice
-Hungary 4 tons of wheat or 4 tons of rice
Opportunity Costs
China 1 t wheat ___ ton rice 1 t rice
___ ton wheat
China
Hungary 1 t wheat ___ ton rice 1 t
rice ___ ton wheat
Hungary
Advantage in wheat? __________
Advantage in rice? __________
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With one unit of resources
-Hungary 4 wheat or 4 rice
- China 2 wheat or 4 rice
With two units of resources, 1 for wheat 1 for
rice
- China __ wheat and __ rice
-Hungary __ wheat and __ rice
Totals __ wheat and __ rice
With two units of resources, produce good with
comparative advantage
- China __ wheat and __ rice
-Hungary __ wheat and __ rice
Totals __ wheat and __ rice
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Free Trade
vs
Protectionism
Tariff-
Quota-
Embargo-
Dumping-
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Trade Restrictions Impact of a Tariff.

• Consider a tariff on autos imports.

• Without a tariff, the world price of autos is
  Pw. At Pw consumers in the U.S. purchase Q1
  units

Price
SDomestic
Qd1 from U.S. producers and
Q1 Qd1 from foreign producers.

• A tariff t makes it more costly for Americans
  to purchase autos from abroad. U.S. prices
  rise to Pw t and purchases fall from Q1 to Q2.

Pw t

• U.S. purchases from domestic producers rise
  from Qd1 to Qd2

Pw
imports fall to Q2 Qd2.
DDomestic

• Producers gain area S

the tariff generates T tax revenues
for the government
Quantity(automobiles)
Qd1
Qd2
Q1
Q2
areas U V are deadweight losses
from reduction in allocative efficiency.
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Trade Restrictions Impact of a Quota

• Consider a quota on peanuts.

• Without trade restraints, Pw (the world price
  of peanuts) would be the domestic price. At Pw
  U.S. consumers would purchase Q1

Price
SDomestic
Qd1 from U.S. producers and
Q1 Qd1 imported from abroad.

• A quota of Q2 Qd2 imports pushes the U.S.
  price up to P2.

P2

• While total U.S. purchases fall (from Q1 to
  Q2), those from U.S. producers rise (from Qd1
  to Qd2) and

Pw
imports fall to Q2 Qd2.

• U.S. producers gain area S. Area T goes to
  foreign producers with permits to import into
  the U.S.

DDomestic
Quantity(peanuts)
Qd1
Qd2
Q1
Q2

• U V are deadweight losses.

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Trade Restriction Impacts
Price
Price
SDomestic
SDomestic


P2
Pw t
Pw
Pw
DDomestic
DDomestic
Quantity(peanuts)
Quantity(automobiles)
Qd1
Qd2
Qd1
Q1
Q2
Qd2
Q1
Q2
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Free Trade
Arguments for
1. Specialization-
2. More goods, lower prices
3. Competition
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Protectionism
Arguments for
1. Infant industries-
2. Domestic employment-
3. Diversification-
4. National security-
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Examples
Positive
IMF - loans and financial assistance
GATT / WTO- tariff reductions
EU - European free trade area
NAFTA - North American free trade area
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True or False
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• The purchase of goods and services from abroad is
  called exporting.
• The largest category of U.S. exports is foods and
  beverages.
• 3. The country with which the United States
  carries on the largest amount of international
  trade is Canada
• 4. The scarcity problem can be eliminated by
  increasing production through specialization.
• 5. A country is said to have a comparative
  advantage over another country if it can produce
  a product at a lower opportunity cost than can
  the other country

6. The availability of appropriate markets and
the ability to trade are necessary if countries
are to specialize in their production
7. Trade restrictions must be imposed between
countries if they are to gain the full benefits
of production according to comparative advantage.
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8. A total ban on imports from another country is
a quota. 9. A tariff is a restriction on the
quantity of a product that can enter a
country. 10. The complete prohibition of trade
in a particular commodity with a particular
nation is called an embargo 11. The prices and
availabilities of goods and services should be
lower with free trade than with restricted
trade 12. One of the protectionist arguments is
that trade restrictions should be imposed to
ensure national security 13. The sale of a
product in a foreign market at a price below cost
is called dumping 14. Negotiations under the
General Agreement on Tariffs and Trade have
resulted in lower tariffs between nations