37

International Trade

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Some Key Trade Facts

Principal U.S. exports
include:

Chemicals
Agricultural products
Consumer durables
Semiconductors
Aircraft

Principal U.S. imports

include:

Petroleum
Automobiles
Metals
Household appliances
Computers

U.S. provides about 8.5%

of worlds exports

LO1

37-2

Economic Basis for Trade

Nations have different resource

LO2

endowments
Labor-intensive goods
Land-intensive goods
Capital-intensive goods

37-3

Comparative Advantage

Assumptions
Two nations
Same size labor force
Constant costs in each country
Different costs between countries
U.S. absolute advantage in both

Opportunity cost ratio

Slope of the curve
Vegetables sacrificed per ton of beef
LO2

37-4

Comparative Advantage
(a) United States

45

40

40

35

35

30

30
25

25

20

20

15

15
12
10

10

5
0

5
4
5

10

15 18 20

Beef (Tons)
LO2

(b) Mexico

Vegetables (Tons)

Vegetables (Tons)

45

25

30

Z
5

8 10

15

20

Beef (Tons)
37-5

Comparative Advantage

LO2

37-6

Comparative Advantage

Terms of trade
U.S. 1V = 1B
U.S. will sell 1B for more than 1V
Mexico 2V = 1B
Mexico will pay less than 2V for 1B
Settle between the two
Depends on supply/demand factors
Assume 1B = 1.5V
LO2

37-7

Comparative Advantage

Gains from trade

Trading possibilities line
Slope equals terms of trade
Improved options
Complete specialization
More of both goods
More efficient resource allocation
LO2

37-8

LO4

Trade Barriers and Export

Subsidies
Tariffs
Revenue tariff
Protective tariff
Import quota
Nontariff barrier (NTB)
Voluntary export restriction (VER)
Export subsidy

37-9

Economic Impact of Tariffs

Direct effects
Decline in consumption
Increase in domestic production
Decline in imports
Tariff revenue
Indirect effects

LO4

37-10

Economic Impact of Quotas

Decline in consumption
Increase in domestic production
Decline in imports
Quotas do not provide for any
government revenue but instead
transfer it to foreign producers

LO4

37-11

The Case for Protection

Military self-sufficiency
Diversification for stability
Infant industry
Protection against dumping
Increased domestic employment
Cheap foreign labor

LO5

37-12

GATT

Three principles:
Equal, nondiscriminatory trade
between member nations
Reduction in tariffs
Elimination of import quotas

LO5

37-13

WTO

Established by Uruguay Round of

LO5

GATT
153 member nations in 2010
Oversees trade agreements and rules
on disputes
Critics argue that it may allow nations
to circumvent environmental and
worker-protection laws
37-14

European Union

Initiated in 1958 as Common Market

Abolished tariffs and import quotas

LO5

between member nations

Established common tariff with
nations outside the EU
Created Euro Zone with one currency

37-15

NAFTA

Agreement between U.S., Canada,

LO5

and Mexico
Established a free trade zone
between the countries
Trade has increased in all countries
Enhanced standard of living

37-16