REV_Lecture_21_-_intl_trade__notes_

REV_Lecture_21_-_intl_trade__notes_ - International Trade...

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1 International Trade Objectives Why do countries trade? Absolute advantage vs. comparative advantage: definition and examples Specialization and trade Trade possibility curve and the benefits of free trade The arguments against trade (and for protection of domestic producers) Tools to restrict trade U.S. trade before 1975 U.S. ran trade surpluses before 1975 and trade deficits after 1975 We faced increasing trade competition in the 1960s We have been running large and growing trade surpluses on services and growing trade deficits on goods
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2 U.S. trade since 1975 By the late 1970s, U.S. trade deficits were mounting By 1984 they crossed the $100 billion mark In 2002, the U.S. trade deficit reached $435 billion The U.S. trade deficit reached $700.3 billion in 2007 First 9 months of 2008, trade deficit is $534.5 billion, up 1.5% over same period last year U.S. trade balance -800,000 -700,000 -600,000 -500,000 -400,000 -300,000 -200,000 -100,000 0 100,000 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year $ million Source: U.S. Census Bureau, www.census.gov/foreign-trade. Why do nations trade? Resources are not equally distributed across countries. For ex., countries differ in terms of climate, labor force and other factor endowments Specialization and trade allows production and consumption of more goods for the world (i.e., as a whole) and for individual countries
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3 Specialization and trade Specialization is the basis for international trade Country A specializes in making the products that it can make most cheaply Country B does the same When they trade, each country will be better off than they would be if they didn’t specialize and trade Example of the gains from trade Consider two countries, say Japan and the U.S., can produce two goods, noodles and bread For simplicity, assume that only labor is used to produce these goods Top 15 U.S. trading partners, 2007 0.0 100.0 200.0 300.0 400.0 500.0 600.0 Canada China Mexico Japan Germany UK S Korea France Taiwan Netherlands Brazil Venezuela Italy S Arabia Singapore $ million Exports Imports
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4 Example of the gains from trade In Japan, it takes 2.5 workers to produce a ton of noodles each month, and it takes 5 workers to produce a ton of bread each month: 1 N = 2.5 workers; 1 B = 5 workers For the U.S., it takes 10 workers to produce a ton of noodles or a ton of bread: 1 N = 10 workers; 1B = 10 workers In Japan there are 20 million workers and in the U.S., there are 100 million workers Absolute advantage Definition: A country has an absolute advantage if it is able to produce a good or service more efficiently (i.e., use less resources) than its trading partners In our example, JAPAN: 1 N = 2.5 workers; 1 B = 5 workers U.S.: 1 N = 10 workers; 1B = 10 workers Japan has the absolute advantage in producing noodles. It uses only 2.5 workers whereas the U.S. uses 10 workers Japan has the absolute advantage in producing bread,
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This note was uploaded on 05/22/2011 for the course ECON 1B taught by Professor Jamie during the Spring '06 term at West Valley.

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REV_Lecture_21_-_intl_trade__notes_ - International Trade...

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