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

Chapter 17International

Trade:Does It

Jeopardize American

Jobs?

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Chapter Outline

• What We Trade And With Whom• The Benefits From Trade• Barriers To Trade• Trade As A Diplomatic Weapon• Kick it Up and Notch: Costs of

Protectionism

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Exports and ImportsAs a percentage of GDP

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What We Trade: Exports (2009)

Good Billions of Dollars of Exports

Elec. Mach. Aud & Video

105.0

Motor Vehicles 95.0Transportation Equipment

84.0

Petroleum 62.7Industrial Mach. 56.5Services 503.0

1,780.5

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What We Trade: Imports (2009)

Good Billions of Dollars of Imports

Petroleum 329.6Motor Vehicles 179.1Telecommunication Eq 137.3

Elec. Mach. Aud & Video 119.7Office Machines 113.5Services 370.0Total 2,282.1

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With Whom We Trade

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Comparative and Absolute Advantage

• Absolute Advantage: the ability to produce a good better, faster, or more quickly than a competitor

• Comparative Advantage: the ability to produce a good at a lower opportunity cost of the resources used

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The Benefits of Trade: When Comparative and Absolute Advantage are the same

Coffee ApplesUnited States

1 2

Brazil 2 1

Suppose there are two countries, the United States and Brazil, and two goods, Apples and Coffee, and the production per unit of labor is shown in the table below.

Clearly, there are benefits from trade. If the Americans focus on apples and the Brazilians focus on coffee and they trade with one another, more apples and more coffee is available to both countries.

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The Benefits of Trade: When Comparative and Absolute

Advantage are Not the Same

Coffee ApplesUnited States

3 2

Brazil 2 1

Now suppose the Americans are better at producing both goods. The Americans have an absolute advantage in both but a comparative advantage in only Apples.

There are still benefits from trade. If the Americans focus on apple production and the Brazilians focus on coffee production and they trade with one another more apples and coffee is available to both countries.

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Terms-of-trade

• The amount of a good one country must give up in order to obtain another good from the other country, usually expressed as a ratio.

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Using Production Possibilities Frontiers

Apples

Coffee

Apples

Coffee

Brazil United States

Production Possibilities Frontier

Production

Possibilities Frontier

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Consumption Possibilities Frontier with Trade

Apples

Coffee

Consumption Possibilities Frontier

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Reasons For Limiting Trade That Many Economists Support

• National Security• National Identity

• Both of the above can be overstated easily.

• Environmental Concerns• Child-Labor Concerns

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Reasons for Limiting Trade that Most Economists Do Not Support• To protect industries from

competition• To temporarily aid an industry that is

just emerging.• To protect an industry from

competition that is dumping (the exporting of goods below cost so as to drive competitors out-of-business) its products in the US.

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Methods of Limiting Trade

• Tariffs: a tax on imports• Quotas: a legal restriction on

the amount of a good coming into the country

• Non-tariff barriers: barriers to trade that result from regulatory actions

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Cost of Limiting Trade

Q/t

S

D

P

Q/t

Domestic Market

Pworld

S

D

PWorld Market

PworldPdomestic

Qd

A

B

C

Q’s Q’d

EF

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Tariffs vs. Quotas

Plimit

C

A

B

E

P

Q/t

D

S

P*

Q*Qlimit

Limiting trade with a quota

S’

}Tariff

F Limiting trade with a tariffA tariff raises tax revenue and a quota does not.

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Costs of Protection• Whether there is a quota or a tariff there

is deadweight loss. This means that the gainers (the people who keep their jobs) gain less than the losers (the people who have to pay higher prices) lose.

• The average cost per job saved via trade barriers is estimated to be $169,000 per year.

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Trade as a Diplomatic Weapon

• Trade sanctions have failed• To get Castro out of Cuba.• To get Iran to release our

hostages in 1979-1980.• To get the Soviet Union out of

Afghanistan.• To get Iraq out of Kuwait in 1990.