1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of...

1©©1999 South-Western College Publishing

PowerPoint Slides prepared by Ken Long

Principles of Economics2nd edition

by Fred M Gottheil

Principles of Economics2nd edition

by Fred M Gottheil

2

Chapter 31Chapter 31Chapter 31Chapter 31International TradeInternational Trade

04/18/23

©©1999 South-Western College Publishing

3

This chapter discusses principles associated with

This chapter discusses principles associated with


Customs UnionsQuotasTariffsFree TradeComparative AdvantageAbsolute AdvantageFree Trade Areas

4

Why do we trade?Why do we trade?Because the costs of

producing goods vary from country to country creating absolute or competitive advantages for trade


5

If Illinois produced corn & oil, how much of each

would it produce?

If Illinois produced corn & oil, how much of each

would it produce?



Assumptions1. Sealed off economy2. Two-goods economy3. Labor is the only resource4. 1 hour of labor needed for both5. There are 200 labor hours6. Ignore law of increasing costs

Cor

n (b

ushe

ls)

Oil (barrels)

a

c

b

200

200

7

What does the previous Production Possibilities

Curve illustrate?

What does the previous Production Possibilities

Curve illustrate?In order for Illinois to have

one bushel unit of corn, it has to give up one barrel of oil, and vice versa



Assumptions1. Sealed off economy2. Two-goods economy3. Labor is the only resource4. 4 hours of labor needed for a bushel of corn and 20 minutes for a barrel of oil5. There are 200 labor hours6. Ignore law of increasing costs

Cor

n (b

ushe

ls)

Oil (barrels)

ac

b600

50

For Oklahoma

9

What does the Oklahoma Production Possibilities

Curve illustrate?

What does the Oklahoma Production Possibilities

Curve illustrate?

To produce a bushel of corn, it has to give up 12 barrels of oil.


10

It pays Illinois and Oklahoma to trade because:

It pays Illinois and Oklahoma to trade because:


• An Oklahoma oiler can take a barrel of oil to Illinois and trade it for a bushel of corn

• An Illinois farmer can take a bushel of corn to Oklahoma and trade it for 12 barrels of oil

11

How much better off would Illinois and

Oklahoma be if both specialize?

How much better off would Illinois and

Oklahoma be if both specialize?


1212


Illinois 100 100 200 0

Oklahoma 25 300 0 600

Total 125 400 200 600

NO TRADE FREE TRADE Corn Oil Corn Oil

13

What is Free Trade?What is Free Trade?International trade that is

not encumbered by protectionist government policies, such as tariffs and quotas


14

What is International Specialization?

What is International Specialization?

The use of a country’s resources to produce specific goods and services, allowing other countries to focus on the production of other goods and services


15

If a country can produce a good using fewer resources than another country, should it always produce

that good?

If a country can produce a good using fewer resources than another country, should it always produce

that good?Not necessarily Only if it has a

comparative advantage in that good.


16

What isAbsolute Advantage?

What isAbsolute Advantage?A country’s ability to

produce a good using fewer resources than those the country it trades with uses


17

What isComparative Advantage?

What isComparative Advantage?

A country’s ability to produce a good at a lower opportunity cost than the country with which it trades


18

What is an example of Comparative Advantage?What is an example of

Comparative Advantage?Even if Americans used fewer

resources than China in making wicker baskets, our opportunity costs would probably be higher


19

What are Imports?What are Imports?Goods and services

bought by people in one county that are produced in other countries


20

What are Exports?What are Exports?Goods and services

produced by people in one country that are sold in other countries


21

What are Terms of Trade?What are Terms of Trade?The amount of a good or

service (export) that must be given up to buy a unit of anther good or service (import)


22

Which countries trade the most?

Which countries trade the most?• United States• Germany• Japan• France• Belgium


23

Who are our main trading partners?

Who are our main trading partners?

• Canada• Japan• Mexico• Germany• Great Britain

• South Korea • France• Hong Kong• Italy• Brazil


24

Check it out the following for more information on trade:

Check it out the following for more information on trade:

http://www.odci.gov/cia/publications/nsolo/wfb-all.htm

http://www.ita.doc.gov/industry/otea/usftu/usftu.html


25

We trade the most with which country?

We trade the most with which country?

Canada


26

Why do countries restrict trade?

Why do countries restrict trade?

To protect domestic industry


27

What are the arguments for Trade Restrictions?

What are the arguments for Trade Restrictions?



-Retaliation-Cheap foreign labor-Protect declining industries -Reduce unemployment-Protect against dumping-National security-Protect infant industries-Diversity of industry

29

What are the arguments against trade restrictions?What are the arguments

against trade restrictions?


30

-Leads to retaliation-Subsidizes weakness-No comparative advantage-Problems with enforcing-Encourages favoritism


31

How is trade restricted? How is trade restricted? • tariffs• import quotas• export subsidies• licensing agreement• unreasonable standards


32

What is a Tariff?What is a Tariff?A tax on an imported good


33

What is a Quota?What is a Quota?A limit on the quantity

of a specific good that can be imported


34

What are other Nontariff barriers?

What are other Nontariff barriers?

• Restrictive health and safety standards

• Politically imposed “voluntary” limits


35

What is the goal of theGeneral Agreement on

Tariffs & Trade (GATT)?

What is the goal of theGeneral Agreement on

Tariffs & Trade (GATT)?

Reduce tariff rates


36

What is a Customs Union?What is a Customs Union?A group of countries that

agrees to free trade among themselves and promotes a common trade policy


37

What is the European Economic Community?What is the European

Economic Community?The EEC is a market in

Europe begun in 1958 as a way of creating barrier-free trade in Europe


38

Who makes up the EEC?Who makes up the EEC?• France• Italy• Belgium• Holland• Germany• Luxembourg• Britain• Ireland


• Denmark• Greece• Spain• Portugal• Iceland• Finland• Sweden• Austria

39

What is a Free Trade Area?What is a Free Trade Area?A group of countries that

agree to free trade among themselves but are free to pursue independent trade policies with other countries


40

What is the North American What is the North American Free Trade Agreement?Free Trade Agreement?

What is the North American What is the North American Free Trade Agreement?Free Trade Agreement?

A free trade area between USA, Canada, and Mexico


41

How high are tariffs? How high are tariffs? U.S. 5.9%Canada 10.5%Australia 9.8%Japan 6.3%EC 6.7%


4242


http://www.usitc.gov http://www.state.gov/www/issues/economic/trade_reports

http://www.bxa.doc.gov

http://www.exim.gov

http://www.ustr.gov

http://itl.irv.uit.no/trade_law/documents/freetrade/wta-94/nav/toc.html

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• Why do we trade between regions and between countries?

• What is Free Trade?• Should a country produce those go

ods it is best at producing?• What is Absolute Advantage?• What is Comparative Advantage?• What are Imports?• What are Exports?

44

•What are the arguments for Trade Restrictions?

•What are the arguments against trade restrictions?

•How is trade restricted?•What is a Tariff?•What is a Quota?•What is GATT?•What is the EEC?•What is NAFTA?

45

ENDENDENDEND


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