Hubbard Ab - Az.ch08

Chapter
8
Comparative Advantage and the Gains from International Trade
Prepared by: Fernando & Yvonn Quijano

2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick OBrien, 2e.
Is Using Trade Policy to Help U.S. Industries a Good Idea?
Learning Objectives
8.1 Discuss the role of international trade in the U.S. economy. 8.2 Understand the difference between comparative advantage and absolute advantage in international trade. 8.3 Explain how countries gain from international trade. 8.4 Analyze the economic effects of government policies that restrict international trade. 8.5 Evaluate the arguments over trade policy and globalization.
Restrictions on trade may preserve jobs in particular industries, but only at the cost of reducing jobs in other industries.
APPENDIX Understand why firms operate in more than one country.
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Learning Objective 8.1
The United States in the International Economy
Tariff A tax imposed by a government on imports. Imports Goods and services bought domestically but produced in other countries. Exports Goods and services produced domestically but sold to other countries.
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The Importance of Trade to the U.S. Economy
FIGURE 8-1
International Trade is of Increasing Importance to the United States
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U.S. International Trade in a World Context
FIGURE 8-2
The Eight Leading Exporting Countries
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U.S. International Trade in a World Context
FIGURE 8-3
International Trade as a Percentage of GDP
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Making
the
Connection
How Expanding International Trade Has Helped Boeing
Rapid growth of international trade spurred demand for the 747 because it has larger cargo capacity than other planes.
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Comparative Advantage in International Trade

A Brief Review of Comparative Advantage
Comparative advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Opportunity Cost The highest valued alternative that must be given up to engage in an activity.

Table 8-1
An Example of Japanese Workers Being More Productive Than American Workers OUTPUT PER HOUR OF WORK CELL PHONES JAPAN 12 2 DIGITAL MUSIC PLAYERS 6 4
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UNITED STATES

Absolute advantage The ability to produce more of a good or service than competitors when using the same amount of resources.
Table 8-2
The Opportunity Costs of Producing Cell Phones and Digital Music Players OPPORTUNITY COSTS CELL PHONES DIGITAL MUSIC PLAYERS JAPAN UNITED STATES 0.5 digital music player 2 digital music players 2 cell phones 0.5 cell phone
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How Countries Gain from International Trade

Autarky A situation in which a country does not trade with other countries.
Table 8-3
Production without Trade PRODUCTION AND CONSUMPTION CELL PHONES DIGITAL MUSIC PLAYERS JAPAN UNITED STATES 9,000 1,500 1,500 1,000
Increasing Consumption through Trade

Terms of trade The ratio at which a country can trade its exports for imports from other countries.
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Increasing Consumption through Trade
Table 8-4
The Gains from Trade for Japan and the United States
WITHOUT TRADE
Production and Consumption
CELL PHONES MP3 PLAYERS
Japan United States
9,000 1,500
1,500 1,000
WITH TRADE
Production with Trade CELL PHONES MP3 PLAYERS 0 4,000 CELL PHONES Export 1,500 Import 1,500 Trade MP3 PLAYERS Import 1,500 Export 1,500 Consumption with Trade CELL PHONES 10,500 1,500 MP3 PLAYERS 1,500 2,500
Japan United States
12,000 0
With trade, the United States and Japan specialize in the good they have a comparative advantage in producing...
...and export some of that good in exchange for the good the other country has a comparative advantage in producing.
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2008 Prentice Hall Business Publishing Consumption Increased Economics R. Glenn Hubbard, Anthony Patrick OBrien, 2e.
GAINS FROM TRADE
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Solved Problem
The Gains from Trade
8-3
WITHOUT TRADE PRODUCTION AND CONSUMPTION CLOTH Portugal England 18,000 63,000 WINE 123,000 18,000
WITH TRADE
PRODUCTION WITH TRADE CLOTH PORTUGAL ENGLAND 0 90,000 WINE 150,000 0 TRADE CLOTH Import 18,000 Export 18,000 WINE Export 18,000 Import 18,000 CONSUMPTION WITH TRADE CLOTH 18,000 72,000 WINE 132,000 18,000
GAINS FROM TRADE INCREASED CONSUMPTION Portugal England 9,000 wine 9,000 cloth
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Why Dont We See Complete Specialization?
Not all goods and services are traded internationally. Production of most goods involves increasing opportunity costs. Tastes for products differ.
Does Anyone Lose as a Result of International Trade?
Dont Let This Happen to YOU!

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Remember That Trade Creates Both Winners and Losers

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Where Does Comparative Advantage Come From?
Climate and natural resources. Relative abundance of labor and capital. Technology. External economies. External economies Reductions in a firms costs that result from an increase in the size of an industry.
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Making Why Is Dalton, Georgia, the Carpetthe
Connection
Making Capital of the World?
Because Catherine Evans Whitener started making bedspreads by hand in Dalton, Georgia, 100 years ago, a multibillion-dollar carpet industry is now located there.
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Comparative Advantage Over Time: The Rise and Fall and Riseof the U.S. Consumer Electronics Industry
Once a country has lost its comparative advantage in producing a good, its income will be higher and its economy will be more efficient if it switches from producing the good to importing it.
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Government Policies That Restrict International Trade

Free trade Trade between countries that is without government restrictions.
Figure 8-4
The U.S. Market for Ethanol under Autarky
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Figure 8-5
The Effect of Imports on the U.S. Ethanol Market
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Tariffs
Figure 8-6
The Effects of a Tariff on Ethanol
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Quotas and Voluntary Export Restraints
Quota A numeric limit imposed by a government on the quantity of a good that can be imported into the country. Voluntary export restraint (VER) An agreement negotiated between two countries that places a numeric limit on the quantity of a good that can be imported by one country from the other country.
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Quotas and Voluntary Export Restraints
Figure 8-7
The Economic Effect of the U.S. Sugar Quota
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Measuring the Economic Effect of the Sugar Quota
We can use the concepts of consumer surplus, producer surplus, and deadweight loss to measure the economic impact of the sugar quota.
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Solved Problem
8-4
Measuring the Economic Effect of a Quota
WITHOUT QUOTA World price of apples U.S. price of apples Quantity supplied by U.S. firms Quantity demanded by U.S. consumers Quantity imported Area of consumer surplus Area of domestic producer surplus Area of deadweight loss $10 $10 6 million boxes 16 million boxes 10 millions boxes A+B+C+D+E+F G No deadweight loss
WITH QUOTA $10 $12 10 million boxes 14 million boxes 4 million boxes A+B G+C D+F 23 of 40
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The High Cost of Preserving Jobs with Tariffs and Quotas
Table 8-5
Preserving U.S. Jobs with Tariffs and Quotas Is Expensive NUMBER OF JOBS SAVED 216 226 605 2,378 609 146 1,556 773 390 COST TO CONSUMERS PER YEAR FOR EACH JOB SAVED $1,376,435 1,285,078 1,044,271 685,323 635,103 603,368 479,452 263,535 257,640
PRODUCT Benzenoid chemicals Luggage Softwood lumber Dairy products Frozen orange juice Ball bearings Machine tools Women's handbags Canned tuna
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The High Cost of Preserving Jobs with Tariffs and Quotas
Table 8-6
Preserving Japanese Jobs with Tariffs and Quotas Is Also Expensive COST TO CONSUMERS PER YEAR FOR EACH JOB SAVED $51,233,000 27,987,000 6,329,000 3,813,000 1,933,000 1,778,000 915,000
PRODUCT Rice Natural gas Gasoline Paper Beef, pork, and poultry Cosmetics Radio and television sets
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Gains from Unilateral Elimination of Tariffs and Quotas
Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange.
Other Barriers to Trade

In addition to tariffs and quotas, governments sometimes erect other barriers to trade.
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The Argument over Trade Policies and Globalization

World Trade Organization (WTO) An international organization that oversees international trade agreements.
Why Do Some People Oppose the World Trade Organization?

Globalization The process of countries becoming more open to foreign trade and investment. Anti-Globalization Some people believe that free trade and foreign investment destroy the distinctive cultures of many countries. Many governments have resisted globalization proposals.
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Banning Goods Made with Child Connection Labor
Making The Unintended Consequences of

the
Would eliminating child labor in developing countries be a good thing?
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Why Do Some People Oppose the World Trade Organization?
Old-Fashioned Protectionism Protectionism The use of trade barriers to shield domestic firms from foreign competition. Protectionism is usually justified on the basis of one of the following arguments: Saving jobs. Protecting high wages. Protecting infant industries.
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Protecting national security.

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Making
the
Connection
Has NAFTA Helped or Hurt the U.S. Economy?
Despite resistance to NAFTA, time proved that the U.S. economy gained jobs.
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Dumping
Dumping Selling a product for a price below its cost of production.
Positive versus Normative Analysis (Once Again)

Positive analysis concerns what is. Normative analysis concerns what ought to be.
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Positive versus Normative Analysis (Once Again)
The success of industries in getting the government to erect barriers to foreign competition depends partly on some members of the public knowing full well the costs of trade barriers but supporting them anyway. However, two other factors are also at work: 1 The costs tariffs and quotas impose on consumers are large in total but relatively small per person. 2 The jobs lost to foreign competition are easy to identify, but the jobs created by foreign trade are less easy to identify.
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An Inside LOOK
The United States and South Korea Reach a Trade Deal
U.S. and South Korea Agree to Sweeping Trade Deal
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Key Terms
Absolute advantage Autarky Comparative advantage Dumping Exports External economies Free trade Globalization
Imports Opportunity cost Protectionism Quota Tariff Terms of trade Voluntary export restraint (VER) World Trade Organization (WTO)
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Appendix
Multinational Firms
Multinational enterprise A firm that conducts operations in more than one country.
Table 8-5
Top 25 Multinational Corporations, 2007
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Appendix
Multinational Firms
Table 8-5
Top 25 Multinational Corporations, 2007 (continued)
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Appendix
Multinational Firms
A Brief History of Multinational Enterprises Foreign direct investment The purchase or building by a domestic firm of a facility in a foreign country. Foreign portfolio investment The purchase by an individual or a firm of stocks or bonds issued in another country.
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Appendix
Multinational Firms
Strategic Factors in Moving from Domestic to Foreign Markets Firms might expect to increase their profits through overseas operations for five main reasons: To avoid tariffs or the threat of tariffs. To gain access to raw materials. To gain access to low-cost labor. To minimize exchange-rate risk. To respond to industry competition.
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Appendix
Reduced Employment and Lowered Connection Wages in the United States?
Making Have Multinational Corporations

the
Many U.S. jobs require technical training.
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Appendix
Multinational Firms
Challenges to U.S. Firms in Foreign Markets Expanding into foreign markets can often be quite difficult and the additional costs incurred may end up being greater than the additional revenue gained. Competitive Advantages of U.S. Firms Some U.S. firms have successful foreign operations because of the strength of their brand names. A U.S. firms global competitive advantage changes over time.
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Chapter

Prepared by: Fernando & Yvonn Quijano

Is Using Trade Policy to Help U.S. Industries a Good Idea?

APPENDIX Understand why firms operate in more than one country.

Learning Objective 8.1

The United States in the International Economy

Learning Objective 8.1

The United States in the International Economy

Learning Objective 8.1

The United States in the International Economy

Learning Objective 8.1

The United States in the International Economy

Learning Objective 8.1

How Expanding International Trade Has Helped Boeing

Learning Objective 8.2

Comparative Advantage in International Trade

Comparative Advantage in International Trade

Learning Objective 8.2

Comparative Advantage in International Trade

Learning Objective 8.3

How Countries Gain from International Trade

Increasing Consumption through Trade

Learning Objective 8.3

How Countries Gain from International Trade

Japan United States

Japan United States

GAINS FROM TRADE

Learning Objective 8.3

Learning Objective 8.3

How Countries Gain from International Trade

Does Anyone Lose as a Result of International Trade?

Dont Let This Happen to YOU!

Remember That Trade Creates Both Winners and Losers

Learning Objective 8.3

How Countries Gain from International Trade

Learning Objective 8.3

Making Why Is Dalton, Georgia, the Carpetthe

Making Capital of the World?

Learning Objective 8.3

How Countries Gain from International Trade

Learning Objective 8.4

Government Policies That Restrict International Trade

Learning Objective 8.4

Government Policies That Restrict International Trade

Learning Objective 8.4

Government Policies That Restrict International Trade

Learning Objective 8.4

Government Policies That Restrict International Trade

Learning Objective 8.4

Government Policies That Restrict International Trade

Learning Objective 8.4

Government Policies That Restrict International Trade

Learning Objective 8.4

Measuring the Economic Effect of a Quota

Learning Objective 8.4

Government Policies That Restrict International Trade

Learning Objective 8.4

Government Policies That Restrict International Trade

Learning Objective 8.4

Government Policies That Restrict International Trade

Other Barriers to Trade

Learning Objective 8.5