Frank Dante Is Proficient in Sales Management

International Trade
Frank
danteDante
MB
MC
MB MC
Introduction
Understanding the Economic Issues
of International Trade
The benefits of trade
The costs of trade
The economic impact of trade
restrictions
Copyright c 2007 by The McGraw-Hill

Companies, Inc. All rights reserved.
Chapter 9: International Trade
Slide 2
MB MC
Comparative Advantage
as a Basis for Trade
The principle of comparative

advantage tells us that we can all
enjoy more goods and services when
each country produces according to
its comparative advantage, and then
trades with other countries.

Slide 3
MB MC
Production and Consumption Possibilities

and the Benefits of Trade
Closed Economy
An economy that does not trade with
the rest of the world
Open Economy
An economy that trades with other
countries

Slide 4
Production Possibilities
Curve for a Many-Worker Economy
MB MC
Coffee (pounds/year)
100,000
Observations
The OC of producing an
additional unit = the slope of
the line that touches the point
OC will increase as output of
on good increases
40,000
B
1,000
2,000
Computers (number/year)
Slide 5
MB MC

A countrys PPC shows the quantities

of different goods that its economy
can produce.
Consumption Possibilities
The combinations of goods and services
that a countrys citizens might feasibly
consume

Slide 6
MB MC

In a closed economy:
Societys production possibilities =
consumption possibilities.
If a country is self-sufficient, it is called
autarky.

Slide 7
MB MC

In an open economy:
The societys consumption possibilities
are typically greater than its production
possibilities.

Slide 8
MB MC
Buying and Selling in World Markets

150,000
120,000
A
C
Assume:
Producing at D
Closed economy
World price of coffee = $10/lb and
computer = $500
100,000
50,000
B
1,000
2,000 2,400
Computers/year
3,000
Slide 9
MB MC

150,000
120,000
E
Consumption
possibilities
A
C
100,000
Observation:
Sell 2,000 computers @ $500
Take the $1million and buy 100,000
pounds of coffee
Consumption possibilities of 150,000 is
greater than PPC without trade
50,000
Production
possibilities
B
1,000
2,000 2,400
Computers/year
F
3,000
Slide 10
MB MC

150,000
120,000
E
Consumption
possibilities
A
C
Observation:
Start at D
Sell 50,000 lbs of coffee
Buy 1,000 computers with the $500,000
Pt F is possible with trade but not on the PPC
100,000
50,000
Production
possibilities
B
1,000
2,000 2,400
Computers/year
F
3,000
Slide 11
MB MC
Production Possibilities, Consumption Possibilities, and

the Optimal Production Mix for an Open Economy
160,000
150,000
120,000
100,000
Consumption
possibilities
50 lbs of coffee trades for 1 computer
LM = consumption possibilities
G is the optimal combination for Costa Rica
Costa Rica can use trade to locate anywhere
along LM
A
C
50,000
D
Production
possibilities
B
1,000
2,000 2,400
Computers/year
M
3,000 3,200
Slide 12
MB MC
Production Possibilities, Consumption Possibilities, and

the Optimal Production Mix for an Open Economy
160,000
150,000
120,000
100,000
Consumption
possibilities
Why produce at G?
Slope of the PPC = LM
Domestic and international opportunity costs
of acquiring an extra computer (in terms of
forgone coffee) are equal
A
C
50,000
D
Production
possibilities
B
1,000
2,000 2,400
Computers/year
M
3,000 3,200
Slide 13
A Straight-Line Production
Possibilities Curve
MB MC
800
600
Observation
The tradeoff between
coffee and tea is
constant at any point
on the PPC
C
200
D
200
600
Tea (pounds/year
800
Slide 14
Two Consumption Possibilities

Curves
MB MC
Consumption possibilities curve

when the world price of coffee is
twice the world price of tea
800
600
A
Islandia produces at A
Islandia can use the money
earned from selling 800 lbs
of coffee to choose any
combination on AD
200
D
200
600
800
Tea (pounds/year
D
1,600
Slide 15
Two Consumption Possibilities

Curves
MB MC
1,600
A
Consumption possibilities curve
when the world price of tea is
twice the world price of coffee
800
600
200
A
Islandia produces at D
Islandia can choose any
combination on AD
C
D
200
600
800
Tea (pounds/year

Slide 16
MB MC
Consumption Possibilities With

and Without International Trade
What Do You Think?

Where should Islandia produce if the
price of coffee and tea were the same?

Slide 17
MB MC
Consumption Possibilities With

and Without International Trade
Observations
With a bow-shaped PPC consumption
possibilities is typically maximized by
producing where the PPC is tangent to
the consumption possibilities line.
With a straight-line PPC production is
completely specialized.

Slide 18
MB MC

Economic Naturalist
Does cheap foreign labor pose a
danger to high-wage economies?

Slide 19
MB MC

Economic Naturalist
Scenario
U.S. and Fredonia produce software and
beef.
Real wages in Fredonia are lower than in the
U.S.
Fredonia is half as productive as the U.S. in
beef production.
Fredonia is one-tenth as productive in
software production.
Slide 20
MB MC

Economic Naturalist
Outcome
Fredonia has a comparative advantage in beef.
U.S. has a comparative advantage in software.
The U.S. will trade software for beef and
increase its consumption of both.
Employment in the software industry in the
U.S. increases and employment in the beef
industry will decrease.

Slide 21
The Market for

Computers in Costa Rica
MB MC
Consumer surplus
without trade = $1mil/yr
2,400
Domestic
supply
Consumer surplus
with trade = $1.96mil/yr
2,400
Producer surplus
with trade = $360K/yr
1,400
1,400
Producer surplus
without trade = $1mil/yr
Domestic
supply
1,000
World
price
Computer Imports
400
Domestic
demand
2,000
Computer per year
Without Trade
400
4,800
Domestic
demand
1,200
2,000 2,800
Computer per year
With Trade
4,800
Slide 22
MB MC
A Supply and Demand

Perspective on Trade
If the price of a good or service in a

closed economy is greater than the
world price, and that economy opens
itself to trade, the economy will tend
to become a net importer of that
good or service.

Slide 23
The Market for

Coffee in Costa Rica
MB MC
Consumer surplus
without trade = $250K/yr
Consumer surplus
Domestic
supply
12
Domestic
supply
12
10
World
price
7
Producer surplus
Producer surplus
without trade = $150K/yr
4
Coffee exports
Domestic
demand
100,000
Without Trade
240,000
Domestic
demand
40,000 100,000
200,000 240,000
With Trade
Slide 24
MB MC
A Supply and Demand

If the price of a good or service in a

closed economy is lower than the
world price, and that economy opens
itself for trade, the economy will tend
to become a net exporter of that
good or service.

Slide 25
MB MC
A Supply and Demand

Observations of the Mutually

Beneficial Gains from Trade
Countries will profit by exporting the
goods and services for which they have
a comparative advantage.
The revenue from the exports are used
to import goods and services for which
they do not have a comparative
advantage.
Slide 26
MB MC
A Supply and Demand

Observations of the Mutually

Beneficial Gains from Trade
The markets will ensure that goods will
be produced where opportunity cost is
lowest.
The consumption possibilities will be
maximized.

Slide 27
MB MC
Price of computers ($/computer)
Exercise 9.4
Domestic
supply
2,400
Question
Given the graph shown,
what impact would trade
have on producer and
consumer surplus?
2,100
World
price
1,200
600
Domestic
demand
200
500
800
1,200
Computers per year

Slide 28
MB MC
A Supply and Demand

Winners and Losers from Trade

Winners
Consumers of imported goods
Producers of exported goods
Losers
Consumers of exported goods
Producers of imported goods

Slide 29
MB MC
A Supply and Demand

Protectionism
The view that free trade is injurious
and should be restricted
Tariff
A tax imposed on an imported good
Quota
A legal limit on the quantity of a good
that may be imported
Slide 30
MB MC
The Market for Computers after the

Imposition of an Import Tariff
Domestic
supply
2,400
E
1,200
World price
+ tariff
1,000
World price
400
Imports
without
tariff
1,200 1,600
2,400 2,800
Domestic
demand
4,800
Computers per year

Slide 31
MB MC

Imposition of an Import Tariff
2,400
Consumer surplus
with tariff = 1.44K/yr
Domestic
supply
Tariff revenue =
$160K/yr
E
1,200
World price
+ tariff
1,000
World price
400
Producer surplus
with tariff = 640K/yr
Imports
with
tariff
1,200 1,600
2,400 2,800
Domestic
demand
4,800
Computers per year

Slide 32
MB MC
Exercise 9.5
Domestic
supply
3,600
Question
Given the graph shown,
how will a tariff of $300
per computer affect total
economic surplus?
2,100
1,500
World
price
1,200
600
Domestic
demand
200 300 500
700 800
1,200
Computers per year

Slide 33
MB MC
Protectionist Policies:
Tariffs and Quotas
What do you think?

Why did President George W. Bush
support the imposition of tariffs on
steel imported into the United States?

Slide 34
MB MC
Protectionist Policies:
Tariffs and Quotas
Quotas
Legal limit on the number or value of
foreign goods that can be imported
Can be enforced by issuing permits

Slide 35
MB MC

Imposition of an Import Quota
Domestic supply
2,400
Domestic
supply + quota
E
1,400
1,200
Imports with free trade

= 1,600 computers/yr
World price
1,000
400
Domestic
demand
1,200 1,600
2,400 2,800
2,000
4,800
Computers per year

Slide 36
MB MC

Imposition of an Import Quota
2,400
Domestic supply
Consumer surplus
with quota = $1,440K/yr
Domestic
supply + quota
E
1,400
Economic rent to
holders of import
licenses = $80K/year
1,200
World price
1,000
Imports = 800
computers/year
400
Producer surplus
with quota = $640K/yr
Domestic
demand
1,200 1,600
2,400 2,800
2,000
4,800
Computers per year

Slide 37
MB MC
A Supply and Demand

Quotas & Tariffs

Market effects of tariffs are the same.
Tariffs generate tax revenue.
Quotas generate revenue for the firms
that hold an import license.

Slide 38
MB MC
A Supply and Demand

Question
Why would the government ever
impose a quota rather than a tariff?

Slide 39
MB MC
A Supply and Demand

Economic Naturalist
Who benefited from and who was hurt
by voluntary export restraints on
Japanese automobiles in the 1980s?

Slide 40
MB MC
A Supply and Demand

Other Barriers to Trade

Red-tape barriers
Regulations

Slide 41
MB MC
A Supply and Demand

The Inefficiency of Protectionism

Trade barriers are inefficient and reduce
the size of the economic pie.
Because trade barriers benefit certain
groups, and these groups may be well
organized, they may be successful in
lobbying for trade barriers.
The gains from trade could be used to
assist groups that have been hurt by
trade.
Slide 42
MB MC
Outsourcing
Outsourcing
A term increasingly used to connote
having services performed by lowwage workers overseas

Slide 43
MB MC
Outsourcing
Outsourcing
Outsourcing of services to low-wage
foreign workers is exactly analogous to
the importation of goods manufactured
by low-wage foreign workers.

Slide 44
MB MC
Outsourcing
Economic Naturalist
Paul Solman and his associate Lee
Koromvokis produce video segments that
provide in-depth analysis of current
economic issues for the PBS evening
news program, The NewsHour with Jim
Lehrer.
Is it likely that his job will someday be
outsourced to a low-wage reporter from
Hyderbad?
Slide 45
MB MC
Outsourcing
Characteristics of Jobs that are Less
Susceptible to Outsourcing
Less rules-based jobs
Face-to-Face complex communication
jobs
Jobs that require the worker to be
physically present

Slide 46
MB MC
Outsourcing
Responding to changing economic
conditions requires the ability to
adapt quickly to new circumstances.
Education provides the means to
develop a comparative advantage
that is not rules-based and does
require complex face-to-face
communication.
Slide 47
End of
Chapter
MB
MC

Frank Dante Is Proficient in Sales Management

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International Trade

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

The principle of comparative

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption Possibilities

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Chapter 9: International Trade

Production and Consumption Possibilities

A countrys PPC shows the quantities

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption Possibilities

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption Possibilities

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Buying and Selling in World Markets

Chapter 9: International Trade

Buying and Selling in World Markets

Chapter 9: International Trade

Buying and Selling in World Markets

Chapter 9: International Trade

Production Possibilities, Consumption Possibilities, and

Chapter 9: International Trade

Production Possibilities, Consumption Possibilities, and

Chapter 9: International Trade

Two Consumption Possibilities

Consumption possibilities curve

Two Consumption Possibilities

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Consumption Possibilities With

What Do You Think?

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Consumption Possibilities With

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption Possibilities

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption Possibilities

Chapter 9: International Trade

Production and Consumption Possibilities

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

The Market for

Chapter 9: International Trade

A Supply and Demand

If the price of a good or service in a

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

The Market for

Chapter 9: International Trade

A Supply and Demand

If the price of a good or service in a

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

A Supply and Demand