2. Is Using Trade Policy to Help U.S. Industries a Good Idea? Learning Objectives 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 . Evaluate the arguments over trade policy and globalization . 6.5 Analyze the economic effects of government policies that restrict international trade . 6.4 Explain how countries gain from international trade. 6.3 Understand the difference between comparative advantage and absolute advantage in international trade. 6.2 Discuss the role of international trade in the U.S. economy . 6.1
3. The United States in the International Economy Tariff A tax imposed by a government on imports. Learning Objective 6.1 Imports Goods and services bought domestically but produced in other countries. Exports Goods and services produced domestically but sold to other countries.
4. The United States in the International Economy Learning Objective 6.1 The Importance of Trade to the U.S. Economy FIGURE 6-1 International Trade is of Increasing Importance to the United States
5. The United States in the International Economy Learning Objective 6.1 FIGURE 6-2 The Eight Leading Exporting Countries U.S. International Trade in a World Context
6. The United States in the International Economy Learning Objective 6.1 FIGURE 6-3 International Trade as a Percentage of GDP U.S. International Trade in a World Context
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8. Comparative Advantage in International Trade Learning Objective 6.2 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. Comparative Advantage in International Trade Table 6-1 An Example of Japanese Workers Being More Productive Than American Workers OUTPUT PER HOUR OF WORK 4 2 UNITED STATES 6 12 JAPAN DIGITAL MUSIC PLAYERS CELL PHONES
9. Comparative Advantage in International Trade Learning Objective 6.2 Absolute advantage The ability to produce more of a good or service than competitors when using the same amount of resources. Table 6-2 The Opportunity Costs of Producing Cell Phones and Digital Music Players Comparative Advantage in International Trade 0.5 cell phone 2 digital music players UNITED STATES 2 cell phones 0.5 digital music player JAPAN DIGITAL MUSIC PLAYERS CELL PHONES OPPORTUNITY COSTS
10. How Countries Gain from International Trade Learning Objective 6.3 Autarky A situation in which a country does not trade with other countries. Table 6-3 Production without Trade Increasing Consumption through Trade Terms of trade The ratio at which a country can trade its exports for imports from other countries. 1,000 1,500 UNITED STATES 1,500 9,000 JAPAN DIGITAL MUSIC PLAYERS CELL PHONES PRODUCTION AND CONSUMPTION
11. How Countries Gain from International Trade Learning Objective 6.3 Table 6-4 Increasing Consumption through Trade The Gains from Trade for Japan and the United States CELL PHONES MP3 PLAYERS CELL PHONES 1,500 MP3 Players United States The increased consumption made possible by trade represents the gains from trade. 1,500 Cell Phones Japan Increased Consumption GAINS FROM TRADE ...and export some of that good in exchange for the good the other country has a comparative advantage in producing. With trade, the United States and Japan specialize in the good they have a comparative advantage in producing... 2,500 1,500 Export 1,500 Import 1,500 4,000 0 United States 1,500 10,500 Import 1,500 Export 1,500 0 12,000 Japan MP3 PLAYERS CELL PHONES MP3 PLAYERS MP3 PLAYERS CELL PHONES Consumption with Trade Trade Production with Trade WITH TRADE 1,000 1,500 United States 1,500 9,000 Japan Production and Consumption WITHOUT TRADE
12. The Gains from Trade Learning Objective 6.3 Solved Problem 6-3 WITHOUT TRADE 123,000 18,000 18,000 63,000 Portugal England WINE CLOTH PRODUCTION AND CONSUMPTION GAINS FROM TRADE 9,000 wine 9,000 cloth Portugal England INCREASED CONSUMPTION 18,000 72,000 Import 18,000 Export 18,000 0 90,000 ENGLAND 132,000 18,000 Export 18,000 Import 18,000 150,000 0 PORTUGAL WINE CLOTH WINE CLOTH WINE CLOTH CONSUMPTION WITH TRADE TRADE PRODUCTION WITH TRADE WITH TRADE
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16. How Countries Gain from International Trade Learning Objective 6.3 Comparative Advantage Over Time: The Rise and Fall—and Rise—of 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.
17. Government Policies That Restrict International Trade Learning Objective 6.4 Free trade Trade between countries that is without government restrictions. Figure 6-4 The U.S. Market for Ethanol under Autarky
18. Government Policies That Restrict International Trade Learning Objective 6.4 Figure 6-5 The Effect of Imports on the U.S. Ethanol Market
19. Government Policies That Restrict International Trade Learning Objective 6.4 Figure 6-6 The Effects of a Tariff on Ethanol Tariffs
20. Government Policies That Restrict International Trade Learning Objective 6.4 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.
21. Government Policies That Restrict International Trade Learning Objective 6.4 Quotas and Voluntary Export Restraints Figure 6-7 The Economic Effect of the U.S. Sugar Quota
22. Government Policies That Restrict International Trade Learning Objective 6.4 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.
23. Measuring the Economic Effect of a Quota Learning Objective 6.4 Solved Problem 6-4 $10 $12 10 million boxes 14 million boxes 4 million boxes A+B G+C D+F $10 $10 6 million boxes 16 million boxes 10 millions boxes A+B+C+D+E+F G No deadweight loss 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 WITH QUOTA WITHOUT QUOTA
24. Government Policies That Restrict International Trade Learning Objective 6.4 The High Cost of Preserving Jobs with Tariffs and Quotas Table 6-5 Preserving U.S. Jobs with Tariffs and Quotas Is Expensive $1,376,435 1,285,078 1,044,271 685,323 635,103 603,368 479,452 263,535 257,640 216 226 605 2,378 609 146 1,556 773 390 Benzenoid chemicals Luggage Softwood lumber Dairy products Frozen orange juice Ball bearings Machine tools Women's handbags Canned tuna COST TO CONSUMERS PER YEAR FOR EACH JOB SAVED NUMBER OF JOBS SAVED PRODUCT
25. Government Policies That Restrict International Trade Learning Objective 6.4 The High Cost of Preserving Jobs with Tariffs and Quotas Table 6-6 Preserving Japanese Jobs with Tariffs and Quotas Is Also Expensive $51,233,000 27,987,000 6,329,000 3,813,000 1,933,000 1,778,000 915,000 Rice Natural gas Gasoline Paper Beef, pork, and poultry Cosmetics Radio and television sets COST TO CONSUMERS PER YEAR FOR EACH JOB SAVED PRODUCT
26. Government Policies That Restrict International Trade Learning Objective 6.4 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.
27. The Argument over Trade Policies and Globalization Learning Objective 6.5 World Trade Organization (WTO) A n 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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31. The Argument over Trade Policies and Globalization Learning Objective 6.5 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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33. An Inside LOOK The United States and South Korea Reach a Trade Deal U.S. and South Korea Agree to Sweeping Trade Deal
34. 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) K e y T e r m s