Hubbard micro6e ppt_ch09

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Economics6th editionChapter 9 Comparative Advantage and the Gains from International Trade1

Copyright 2017 Pearson Education, Inc. All Rights Reserved

Copyright 2017 Pearson Education, Inc. All Rights Reserved

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Chapter Outline9.1 The United States in the International Economy9.2 Comparative Advantage in International Trade9.3 How Countries Gain from International Trade9.4 Government Policies That Restrict International Trade9.5 The Arguments over Trade Policies and Globalization

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Copyright 2017 Pearson Education, Inc. All Rights ReservedWhy is there a tariff on running shoes?99 percent of shoes sold in the United States are made overseas.The federal government imposes a tax on running shoes imported to the United States (called a tariff).Tariffs are designed to protect domestic workers from overseas competition.Do you think the tariff on running shoes makes you better or worse off?Do you think it makes Americans in general better or worse off?3

Copyright 2017 Pearson Education, Inc. All Rights Reserved9.1 The United States in the International EconomyDiscuss the role of international trade in the U.S. economyInternational trade has grown more and more important to the world economy over the past 50 years.Falling shipping and transportation costs have made international trade more profitable and desirable.Traditionally, countries imposed high tariffs on imports, believing that such measured made their own firms and consumers better off. But that meant their exports were similarly taxed.Tariff: A tax imposed by a government on importsImports: Goods and services bought domestically but produced in other countries.Exports: Goods and services produced domestically but sold in other countries.4

Copyright 2017 Pearson Education, Inc. All Rights ReservedFigure 9.1 International trade is of increasing importance to the United StatesSince 1970, both imports and exports have been steadily rising as a fraction of U.S. gross domestic product (GDP).International trade has been becoming a more and more important part of the American economy.

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Copyright 2017 Pearson Education, Inc. All Rights ReservedFigure 9.2 The eight leading exporting countries, 2014The rapid growth of the Chinese economy has made it the worlds largest exporter, with 10.3 percent of world exports.China took over the lead from the U.S., which accounts for 9.6 percent of world exports.6

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Copyright 2017 Pearson Education, Inc. All Rights ReservedFigure 9.3 International trade as a percentage of GDP, 2014Trade makes up a relatively small part of the economy for the the United States (and China, to a lesser extent), especially compared with smaller countries.This is mostly due to the relative sizes of the economies.7

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Copyright 2017 Pearson Education, Inc. All Rights ReservedMaking the Connection: How would the TPP affect New Balance? (1 of 2)Founded in 1906, New Balance is headquartered in Boston, MA.It operates 5 U.S.-based factories manufacturing shoesBut many of its shoe parts, and ~75 percent of whole shoes, are imported.The Trans Pacific Partnership (TPP) is a trade agreement that includes reduction in some tariffs on imported shoes and shoe parts.8

Copyright 2017 Pearson Education, Inc. All Rights ReservedTPP was still under negotiation as I was writing these slides.8

Making the Connection: How would the TPP affect New Balance? (2 of 2)The TPP would both help and hurt New Balance. The reduction in tariffs would:Make production of shoes cheaper for them.Make production and import of shoes cheaper for their competitors like Nike, which imports most of its shoes from Vietnam.Overall, TPPs effects on New Balance are uncertain.9

Copyright 2017 Pearson Education, Inc. All Rights Reserved9.2 Comparative Advantage in International TradeExplain the difference between comparative advantage and absolute advantage in international tradeRecall that comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.Comparative advantage arises from having a lower opportunity cost than your competitor.Opportunity cost: The highest-valued alternative that must be given up to engage in an activity.10

Copyright 2017 Pearson Education, Inc. All Rights ReservedTable 9.1 An example of Japanese workers being more productive than American workersJapan has an absolute advantage in producing both smartwatches and tables.Absolute advantage: The ability to produce more of a good or service than competitors when using the same amount of resources.But comparative advantage means that trade can still be advantageous for both nations.11

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Copyright 2017 Pearson Education, Inc. All Rights ReservedTable 9.2 The opportunity cost of producing smartwatches and tabletsThis table shows what has to be given up to create each good: the opportunity cost.If the nations were in autarky, a situation in which a country does not trade with other countries, these would also be the relative prices in each country: a smartwatch would trade for half the price of a tablet computer in Japan, and double the price of a tablet computer in America.Japan would like to trade its cell phones for American tablets, and vice versa.12

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Copyright 2017 Pearson Education, Inc. All Rights Reserved9.3 How Countries Gain from International TradeExplain how countries gain from international tradeIf countries did not trade, they would consume what they produced.But if countries have different opportunity costs, they might each be willing to trade some of what they have a comparative advantage at producing, for what the other country is (relatively) good at producing.Both countries might be made better off by such a trade.13

Copyright 2017 Pearson Education, Inc. All Rights ReservedTable 9.3 Production without tradeSuppose that initially each country has 1000 hours to spend.In that time, Japan might produce 9,000 smartwatches and 1,500 tablet computers.In the same time, the U.S. might produce 1,500 smartwatches and 1,000 tablet computers.In total, 10,500 smartwatches and 2,500 tablet computers are produced.14

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Copyright 2017 Pearson Education, Inc. All Rights ReservedProduction in autarkypreparing for tradeObserve what happens if each country specializes in its comparative advantage:Japan can produce 12,000 smartwatches.The U.S. can produce 4,000 tablet computers.In total, 12,000 smartwatches and 4,000 tablet computers are produced.Observe that more of both goods are produced.15Production and Consumption SmartwatchesTablet ComputersJapan12,0000United States04,000

Copyright 2017 Pearson Education, Inc. All Rights ReservedDeciding on terms of tradeThe terms of trade is the ratio at which a country can trade its exports for imports from other countries.No country would accept terms of trade worse than its opportunity costit would be better off producing by itself the goods that it was importing.Terms of trade of one-for-one could be acceptable to both Japan and the United States.With these terms, they might trade 1,500 cell phones for 1,500 computers, ending with the consumption on the following slide:16

Copyright 2017 Pearson Education, Inc. All Rights ReservedTable 9.4 Gains from trade for Japan and the United States17

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Copyright 2017 Pearson Education, Inc. All Rights ReservedWhy dont we see complete specialization?In the real world, products are not generally produced by only one nation. Reasons include:Not all goods and services can be traded internationally (medical services, for example).Production of many goods involves increasing opportunity costs (so small amounts of production are likely to take place in several countries).Tastes for products differ (cars, for example); countries might have comparative advantages in different sub-types of products.18

Copyright 2017 Pearson Education, Inc. All Rights ReservedWhats the bad news about international trade?So far, we have made it appear that international trade is going to be good for everybody.But this is true only on a national level.Some individual firms and consumers will lose out due to international trade; in our example:Japanese tablet computer firms and their workersAmerican smartwatch firms and their workersThese groups would likely ask their governments to implement protectionist measures like tariffs and quotas, in order to protect them from foreign competition.Quota: A numerical limit a government imposes on the quantity of a good that can be imported into that country.19

Copyright 2017 Pearson Education, Inc. All Rights ReservedWhere does comparative advantage come from? (1 of 2)Comparative advantage can derive from a variety of natural and man-made sources:Climate and natural resourcesSome nations are better-suited to particular types of production; particularly important for agricultural goods.Example: bananas in Costa Rica vs. wheat in U.S.Relative abundance of labor and/or capitalSome nations have lots of high- or low-skilled workers, or relatively much or little infrastructure.Example: China has lots of low-skilled workers, vs. relatively many high-skilled workers in the U.S.20

Copyright 2017 Pearson Education, Inc. All Rights ReservedWhere does comparative advantage come from? (2 of 2)Comparative advantage can derive from a variety of natu