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Farazrehman 1506 20199 1 ch19
Farazrehman 1506 20199 1 ch19
MACROECONOMICS
TENTH EDITION
PART V The World Economy
International Trade,
Comparative Advantage, and 19
Protectionism
CHAPTER
OUTLINE
Trade Surpluses and Deficits
The Economic Basis for Trade: Comparative
Advantage
Absolute Advantage versus Comparative Advantage
Terms of Trade
Exchange Rates
The Sources of Comparative Advantage
The Heckscher-Ohlin Theorem
Other Explanations for Observed Trade Flows
Trade Barriers: Tariffs, Export Subsidies, and
Quotas
PART V The World Economy
The inextricable connection of the U.S. economy to the economies of the rest of
the world has had a profound impact on the discipline of economics and is the
basis of one of its most important insights:
trade surplus The situation when a country exports more than it imports.
trade deficit The situation when a country imports more than it exports.
PART V The World Economy
TABLE 19.3 Total Production of Wheat and Cotton Assuming No Trade, Mutual
Absolute Advantage, and 100 Available Acres
PART V The World Economy
FIGURE 19.1 Production Possibility Frontiers for Australia and New Zealand Before Trade
Without trade, countries are constrained by their own resources and productivity.
© 2012 Pearson Education, Inc. Publishing as Prentice Hall 10 of 31
The Economic Basis for Trade: Comparative Advantage
TABLE 19.4 Production and Consumption of Wheat and Cotton after Specialization
Production Consumption
New Zealand Australia New Zealand Australia
Wheat 100 acres × 0 acres Wheat 300 bushels 300
6 bushels/acre bushels
600 bushels 0
Cotton 0 acres 100 acres × 6 Cotton 300 bales 300 bales
0 bales/acre
600 bales
PART V The World Economy
TABLE 19.6 Total Production of Wheat and Cotton Assuming No Trade and
100 Available Acres
PART V The World Economy
The real cost of cotton is the wheat sacrificed to obtain it. The cost of 3 bales of cotton in New Zealand is 3 bushels of wheat
(a half acre of land must be transferred from wheat to cotton— refer to Table 19.5).
However, the cost of 3 bales of cotton in Australia is only 1 bushel of wheat. Australia has a comparative advantage over New
Zealand in cotton production, and New Zealand has a comparative advantage over Australia in wheat production.
© 2012 Pearson Education, Inc. Publishing as Prentice Hall 15 of 31
The Economic Basis for Trade: Comparative Advantage
Terms of Trade
Exchange Rates
Exchange Rates
TABLE 19.8 Domestic Prices of Timber (per Foot) and Rolled Steel
(per Meter) in the United States and Brazil
United States Brazil
Timber $1 3 Reals
Rolled steel $2 4 Reals
Exchange Rates
production.
Smoot-Hawley tariff The U.S. tariff law of the 1930s, which set the
highest tariffs in U.S. history (60 percent). It set off an international
trade war and caused the decline in trade that is often considered
one of the causes of the worldwide depression of the 1930s.
Economic Integration
Tariff Wars
A tariff of $1 increases the market price facing consumers from $2 per yard to $3 per yard. The government collects
revenues equal to the gray shaded area in b. The loss of efficiency has two components.
First, consumers must pay a higher price for goods that could be produced at lower cost.
Second, marginal producers are drawn into textiles and away from other goods, resulting in inefficient domestic
production. The triangle labeled ABC in b is the dead weight loss or excess burden resulting from the tariff.
© 2012 Pearson Education, Inc. Publishing as Prentice Hall 25 of 31
ECONOMICS IN PRACTICE
A Petition
Screening out the sun would increase the demand for candles.
Should candle makers be protected from unfair competition?
© 2012 Pearson Education, Inc. Publishing as Prentice Hall 26 of 31
Free Trade or Protection?
Environmental Concerns
PART V The World Economy
FIGURE 19.5 Trade Openness across the World (Index is 100 minus the average effective tariff rate in the region.)
Critical to our study of international economics is the debate between free traders
and protectionists.
Free international trade raises real incomes and improves the standard of living.
Although protectionists point to the loss of jobs and argue for the protection of
workers from foreign competition, foreign competition is unlikely to cause net job
loss in an economy.
Although economists disagree about many things, the vast majority of them favor
free trade.
trade surplus
General Agreement on Tariffs and
Trade (GATT) U.S.-Canadian Free Trade Agreement
Heckscher-Ohlin theorem World Trade Organization (WTO)