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Micro Economics- Chapter 28- International Trade

by: Ivey Mayhue

Micro Economics- Chapter 28- International Trade Econ 2106

Marketplace > University of North Georgia > Economcs > Econ 2106 > Micro Economics Chapter 28 International Trade
Ivey Mayhue
GPA 3.4

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About this Document

These notes cover chapter 28, which will be on the final exam.
Steve smith
Study Guide
Economics, Microeconomics, International, trade
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This 6 page Study Guide was uploaded by Ivey Mayhue on Tuesday May 3, 2016. The Study Guide belongs to Econ 2106 at University of North Georgia taught by Steve smith in Spring 2016. Since its upload, it has received 134 views. For similar materials see Microeconomics in Economcs at University of North Georgia.


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Date Created: 05/03/16
Chapter 28- International Trade 28.1-The Growth in World Trade 28.1a Importance of International Trade  Some nations are virtually closed economies- no interaction with other economies 28.1b U.S. Exports and Imports  U.S exports include transportation, insurance, banking, education and tourism, capital goods such as aircraft, industrial supplies such as chemicals and plastics, food, automobiles and consumer goods such as pharmaceuticals and entertainment products  U.S. imports include industrial supplies such as crude oil and refined petroleum products, consumer goods, capital goods, services, automobiles, and food. 28.1 c Trading Partners  The U.S. trades with a large number of countries, the most important being Canada, Mexico, China, Japan, Germany and the United Kingdom 28.2- Comparative Advantage and Gains From Trade 28.2a Economic Growth and Trade  It is concluded that the existence of trade suggests that trade is economically beneficial  Classical economist David Ricardo is given most credit for developing the economic theory that more explains how trade can be mutually beneficial to both parties, raising output and income levels in the entire trading area. 28.2b The Principle of Comparative Advantage  Ricardo’s theory of international trade centers on the concept of comparative advantage.  Persons, regions or countries can gain by specializing in the production of the good in which they have a comparative advantage  For a highly productive nation to produce goods in which it is only marginally more productive for other nations the nation must take resources from the production of other goods in which its productive abilities are markedly superior 28.2c Comparative Advantage, Specialization, and the Production Possibilities Curve  The production possibilities curve represents the maximum possible combinations that can be produced given the fixed set of resources and technology  A negatively sloped production possibilities curve means that when one good is produced, with the fixed resources, the opportunity to produce another good is given up Absolute and Comparative Advantage  Occurs when one producer can do a task using fewer inputs than the other producer Gains from Specialization and Exchange  To achieve any of the gains form comparative advantage and specialization, there must be trade  With exchange/trade, it allows production and consumption of a combination of two goods beyond what would have been attainable if it were not for specialization and exchange Individuals and Nations Gain from Specialization and Trade  Because of specialization, according to comparative advantage, both nations can be better off, even if one nation has an absolute advantage in both goods over the other.  The greater the difference in opportunity cost between the two trading partners, the greater the benefits from specialization and exchange  Free trade does not guarantee that each individual will be better off or that everyone will receive the same benefits, but it does meant that collectively, the population of each nation will benefit from the trade.  NAFTA: North American Free Trade Agreement: when it was passed, many U.S. jobs went south to Mexico because of lower production costs.  Many economists did not see NAFTA as a threat to the US economy because of comparative advantage and gains from trade. NAFTA did hurt some individuals, as some lower-skilled jobs were lost to Mexico, but consumers have enjoyed lower prices as a result of the increased specialization and trade. 28.2d Why Does Comparative Advantage Occur?  Three primary reasons for comparative advantage: climate, factor endowments and technology o Ex: the opportunity cost of producing bananas or coffee is much lower in tropical countries than in the U.S. because of climate  If a country has an abundance of a particular factor of production, labor for example, then it will tend to have a lower opportunity cost of producing a labor-intensive good o Ex: china and Bangladesh produce clothing. Producing clothing is a labor-intensive activity that requires a lot of labor, but does not require a lot of human capital- you do not need a highly educated workforce  Some countries develop superior technology in their production processes o Ex: the U.S. has been the leader in aircraft production, but that technological advantage is slowly eroding, as Europeans are emerging in this market 28.2e Regional Comparative Advantage  The principle of comparative advantage can be applied to regional markets  Trade has evolved in large part because different geographic areas have different resources and therefore different production possibilities  By specializing in products in which it has a comparative advantage, an area has the potential of having more goods and services, assuming it trades the additional output for other desirable goods and series that others can produce at a lower opportunity cost 28.3 Supply and Demand in International Trade 28.3a The Importance of Trade: Producer and Consumer Surplus  Consumer Surplus: the difference between the most a consumer would be willing to pay for a quantity of a good and what a consumer actually has to pay  Producer Surplus: the difference between the lowest price for which a supplier would be willing to supply a quantity of a good or service and the revenues a supplier actually receives for selling  The demand curve represents the maximum prices that consumers are willing and able to pay for different quantities of a good or service  The supply curve represents the minimum prices supplies require to be willing to supply different quantities of that good or service  Once output is reached at the equilibrium price, all the mutually beneficial opportunities from trade between supplies and demanders will have taken place; the sun of consumer surplus and producer surplus is maximized  The total gain to the economy from trade is the sum of the consumer and producer surpluses.  Consumers benefit from additional amounts of consumer surplus, and producers benefit from additional amounts of producer surplus 28.3b Free Trade and Exports- Domestic Producers Gain More Than Domestic Consumers Lose (pg. 847-848)  Free trade and exports affect both domestic consumers and domestic producers 28.3c Free Trade and Imports- Domestic Consumers Gain More Than Domestic Producers Lose (pg. 849-850) 28.4 Tariffs, Import Quotas, and Subsidies 28.4a Tariffs  A tariff is a tax on imported goods  Usually relatively small revenue producers that retard the expansion of trade  They bring about higher prices and revenues for domestic producers and lower sales and revenues for foreign producers  Tariffs lead to higher prices for domestic consumers 28.4b The Domestic Economic Impact of Tariffs  Domestic producers gain more sales and higher earnings, consumers lose much more.  The increase in price from the tariff results in a loss in consumer surplus  Import tariff- the revenue government collects from foreign countries on imports  Tariffs increase output by domestic producers thus leading to increased employment and reduced unemployment in industries where tariffs have been imposed 28.4c Arguments for Tariffs Temporary Trade Restrictions Help Infant Industries Grow  A country might argue that a protective tariff will allow a new industry to more quickly reach a scale of operation at which economies of scale and production efficiencies can be realized  Temporarily shielding the young industry from competition from foreign firms will allow the infant industry a chance to grow  With early protection, these firms will eventually be able to compete effectively in the global market  The goal of allowing the industry to reach its efficient size can be reach without protection  The history of infant industry tariffs suggests that the tariffs often linger long after the industry is mature and no longer in need of protection. Tariffs Can Reduce Domestic Unemployment  The overall employment effects of a tariff imposition are not likely to be positive  If new tariffs lead to restrictions on imports, fewer dollars will be flowing overseas in payment for imports, which means that foreigners will have fewer dollars available to buy our exports.  Other things being equal, this situation will tend to reduce our exports, thus creating unemployment in the export industries Tariffs Are Necessary for Reasons of National Security  Sometimes it is argued that tariffs are a means of preventing a nation from becoming too dependent on foreign suppliers of goods vital to national security  By making foreign goods more expensive, we can protect domestic supplies o Ex: If oil is vital to operating planes and tanks, losing foreign supplies of oil during wartime could cripple a nation’s defense  If a nationals own resources are depletable, tariff-imposed reliance on domestic supplies will hasten depletion of domestic reserves, making the country even more dependent on imports in the future  If we impose a high tariff on foreign oil to protect domestic producers, we will increase domestic output of oil in the short run o In the process we will deplete the stockpile of available reserves o The defense argument is of questionable validity Are Tariffs Necessary to Protect against Dumping?  Dumping occurs when a foreign country sells its products at prices below their costs or below the prices for which they are sold on the domestic market  The US has antidumping laws; if a foreign country is found guilty of dumping, the US can impose antidumping tariffs on that country’s products, which will raise the price of foreign goods that are being dumped. o It is hard to prove dumping; foreign countries may simply have lower steel production costs, so what may seem like dumping may just be comparative advantage 28.4d Import Quotas  Import quota: a legal limit on the imported quantity of a good that is produced abroad and can be sold in domestic markets  Directly restrict imports, leading to reductions in trade and thus preventing nations from fully realizing their comparative advantage  The U.S. government does not collect any revenue as a result of the import quota 28.4e The Domestic Economic Impact of an Import Quota  Quota benefits the foreign producer who is lucky enough to receive an import license o They are lucky because they can sell their allotted amount of output at the higher domestic price rather than the lower world price  Rent seeking: efforts by producers to gain profits from government protections such a tariffs and import quotas 28.4f The Economic Impact of Subsidies  Governments sometimes try to encourage exports by subsidizing products  With a subsidy, revenue is given to producers for each exported unit of output, which stimulates exports  Producers will exports goods because their costs have been artificially reduced by government action, transferring income from taxpayers to the exporter  The subsidy does not reduce the amounts of actual labor, raw material and capital costs of production o The nations taxpayers end up subsidizing the output of producers whom relative to producers in other countries, are inefficient o The nation, then is exporting products in which it does not have comparative advantage o Gains from trade in terms of world output are eliminated by such subsidies 28.4g GATT Agreements and the World Trade Organization  Smoot-Hawley tariff- designed to protect domestic industries  To get freer trade, a country can either remove trade restrictions on its own or mutually reduce trade restrictions with other countries  GATT: General Agreement on Tariffs and Trade o Agreement has reduced tariff rates worldwide o The GATT was then replaced by the World Trade Organization (WTO)  WTO: World Trade Organization o Responsible for monitoring and enforcing trade agreements  Provides a forum for nations to handle disputes  Produces protection against special interest groups in member nations 28.4h Regional Trading Areas  Another approach to reducing trade barriers is opening up regional trading areas.  By opening regional trade areas it reduces tariffs and other trade barriers


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