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Topic 22 - International trade.pdf

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James Pesando

Topic 22 – International Trade March 21 – 23 rd Outline: 1. The Gains from Trade: Individuals (Omit – see Micro) -- Example -- Consume outside PPF 2. The Gains from Trade: Nations -- Overall Gain -- Winners and Losers 3. (Weak) Arguments Against Trade 4. Tariffs;  The Gains from Trade: Individuals -- Omit; see Micro Notes; -- Two ways of expressing PPF: 1. Production Possibilities (Per Week) Cloth Corn John 15 3 Jane 32 16 Resources Required to Produce One Unit of: Cloth Corn John 1/15 1/3 Jane 1/32 1/16 (These two are the same) Opportunity Cost of Producing One unit of : Cloth Corn John 0.2 corn 5 cloth Jane 0.5 corn 2 cloth  The Gains from Trade: Nations Overall Gain: With trade, a country can consume outside its PPF by specializing in the production of goods in which it has a comparative advantage. Q: How can you tell if a country has comparative advantage in the production of good? A: Look at which goods the country is importing and exporting Domestic price < world price  country has a comparative advantage and will export good; Domestic price > world price  country does not have a comparative advantage and will import good; (Remember: in perfect competition, prices reflect costs of production (P=ATC) ) Observations: World Price: Internationally traded goods with low transportation costs must sell at same price in all countries Domestic price < world price indicates low opportunity cost of producing domestic good Case 1: Canada has C.A. in Producing Wheat Before Trade After Trade (Assume Price of Wheat is Determined in World Market) P SS SS World Price PBT PBT DD DD Q BT Q Q D Q S Q Export World price > Domestic price; Quantity supplied – Quantity demanded = export Case 2 - Opposite Case: Canada does not have comparative advantage in production of textiles SS World price < Domestic price; Quantity demanded – Quantity supplied = imports world price DD S D Q Imports Q International Trade: Higher world output (greater productivity) Higher real GDP per capita (economic “well being”) e.g. March 2009 (world-wide recession) Volume of world trade has fallen sharply Japan: Feb 2009 vs Feb 2008 Exports fell 49.4% Countries may pursue “protectionist” policies, to help domestic economies Yet “protectionist” trade policies will slow world-wide recovery Lesson from Great Depression 1. Tariffs imposed by U.S. led to retaliation, surge in protectionism 2. Prolonged world-wide Depression Terms of Trade Definition: Index of export prices/index of import prices Insight: If terms of trade increase, country is better off; Intuition: An increase in the terms of trade means either: 1. Goods that country exports have become more expensive; 2. Goods that country imports have become less expensive Conclusion: an increase in a country’s terms of trade is beneficial because it expands the country’s consumption possibilities.  (Weak) arguments against trade 1. Job Loses Jobs will be gained (export industries) and jobs will be lost (import – competing industries) 2. “Cheap Foreign Labor” Comparative advantage, not absolute advantage, is the key to trade; Cheap ≠ Lower wage; Cheap = Lower Unit Labor Cost; Unit labor cost = wage rate/labor productivity Cannot infer difference in unit labor costs from difference in wage rates; High Wage Country Low-wage Country (Germany) (Costa-Rica) Hourly wage $20 $2 Labor Productivity 20 1 Unit Labor Cost $20/20 = $1 $2/1 = $2 Germany has higher wage than Costa-Rica, but are more successful in exporting;  Tariffs Tariff: tax imposed on imported goods) Q: Why do countries impose tariffs? A: To protect import-competing industries (“special interest”) e.g. 1) Country imports good (and also produces good domestically) 2) Country is small
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