Lecture26Post--INTERNATIONALTRADE

Lecture26Post--INTERNATIONALTRADE - International Trade How...

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Unformatted text preview: International Trade How trading according to the principle of comparative advantage provides mutual gains to trading nations and their citizens The U.S. has become more and more enmeshed in a global economy since 1960 Exports of goods and services accounted for 13% of GDP in 2008 compared with 6% in 1960 x Imports of goods and services were 16.5% of GDP in 2008 compared with 6% in 1960 x Principles of International trade International trade opens up the possibility of gains in global efficiency in resource use by allowing mutual gains to trading partners that would not be possible if each nation attempted to be self-sufficient x A nation has a comparative advantage over a trading partner in the production of an item if it can produce it at lower opportunity cost than its partner. x Nation A has a comparative advantage in wheat Wheat (tons per year) Nation B has a comparative advantage in bananas 20 17.5 Wheat (tons per year) w z Opportunity cost per ton of wheat in A = 1 ton of bananas Opportunity cost per ton of bananas is A = 1 ton of wheat 5 2.5 0 20 15 Opportunity cost per ton of wheat in A = 2 ton of bananas Opportunity cost per ton of bananas is A = 1/2 ton of wheat y x 5 10 Bananas (tons per year) 5 0 Bananas (tons per year) International trade allows consumption possibilities to exceed production possibilities A citizens of a nation can gain from international trade even if they have an absolute advantage in all traded goods x The opportunity cost rather than the resource costs of traded products determines comparative advantage x International trade improves living standards by allowing consumption possibilities to exceed production possibilities x Protectionism: Tariffs are taxes on imported products that raise prices to domestic consumers Price (dollars per unit) E2 P2 P1 PN= P2-T E1 Supply after tariff Initial Supply Demand 0 Q2 Q1 Q Protectionism: Import quotas limit the amount of foreign goods that can be imported Price (dollars per unit) P2 P1 Supply after import Quota Initial Supply E2 E1 Demand 0 Q2 Q1 Q Import Quotas vs. Tariffs Both import quotas and tariffs raise prices of foreign goods to consumers to protect domestic jobs. x Domestic producers and workers in protected industries gain at the expense of consumers. x Tariffs generate revenue to government but import quotas do not -- foreign sellers are better off with quotas because their net price is higher than would be the case for a tariff that would raise market price the same amount x Effects of Tariffs and Quotas in the U.S. Import quotas on Japanese cars from 19811983 raised their prices on average by $1000 and contributed to a $370 average increase in the price of domestic cars. x In 1987 quotas on textile imports were equivalent to a 22% tariff and the combined effect of tariffs and quotas raise textile prices 38% and apparel prices 46% that year. x Effects of Tariffs and Quotas in the U.S. In 1987 protection of the textile industry saved an estimated 60,000 jobs x The cost per job saved measured by the increased amount paid for clothing and textile products by consumers per job saved was estimated to be between $40,000 and $52,000 x The jobs saved paid an average of $20,000 per year x ...
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