Chapter 15 Lecture Presentation

15 INTERNATIONAL
TRADE POLICY
After studying this chapter, you will be able to:
 Explain how markets work with international
trade
 Identify the gains from international trade and

its winners and losers
 Explain the effects of international trade barriers
 Explain and evaluate arguments used to justify

restricting international trade
© 2016 Pearson Education, Ltd.

How Global Markets Work
Because we trade with people in other countries, the

goods and services that we can buy and consume are not
limited by what we can produce.
Imports are the goods and services that we buy from
people in other countries.
Exports are the goods and services we sell to people in
other countries.

International Trade Today

Global trade today is enormous.
In 2013, global exports and imports were $23 trillion, which
is one third of the value of global production.
In 2013, total U.S exports were $2.3 trillion, which is about
14 percent of the value of U.S. production.
In 2013, total U.S. imports were $2.7 trillion, which is about
17 percent of the value of total U.S. expenditure.
Services were about 33 percent of total U.S. exports and
about 20 percent of total U.S. imports.

What Drives International Trade?

The fundamental force that generates trade between
nations is comparative advantage.
The basis for comparative advantage is divergent
opportunity costs between countries.
National comparative advantage is the ability of a nation to
perform an activity or produce a good or service at a lower
opportunity cost than any other nation.

The opportunity cost of producing a T-shirt is lower in

China than in the United States, so China has a
comparative advantage in producing T-shirts.
The opportunity cost of producing an airplane is lower in
the United States than in China, so the United States has
a comparative advantage in producing airplanes.
Both countries can reap gains from trade by specializing in
the production of the good in which they have a
comparative advantage and then trading.
Both countries are better off.

Why the United States

Imports T-Shirts
Figure 15.1(a) shows U.S.
demand and U.S. supply
with no international trade.
The price of a T-shirt is $8.
U.S. firms produce
40 million T-shirts a year
and U.S. consumers buy
40 million T-shirts a year.

Figure 15.1(b) shows the

market in the United States
with international trade.
World demand and world
supply of T-shirts determine the
world price of a T-shirt at $5.
The world price is less than $8,
so the rest of the world has a
comparative advantage in
producing
T-shirts.

With international trade, the

price of a T-shirt in the United
States falls to $5.
At $5 a T-shirt, U.S. garment
makers cut production to
At $5 a T-shirt, U.S.
consumers buy 60 million T-
shirts a year.
The United States imports 40
million T-shirts a year.

Why the United States

Exports Airplanes
Figure 15.2(a) shows U.S.
demand and U.S. supply
with no international trade.
The price of an airplane is
$100 million.
Boeing produces 400
airplanes a year and U.S.
airlines buy 400 a year.


market in the United States
with international trade.
World demand and world
supply of airplanes determine
the world price of an airplane
at $150 million.
The world price exceeds $100
million, so the United States
has a comparative advantage
in producing airplanes.

With international trade,

the price of an airplane in the
United States rises to $150
million.
At $150 million, U.S. airlines
buy 200 jets a year.
At $150 million, Boeing
produces 700 airplanes a year.
The United States exports 500
airplanes a year.

Winners, Losers, and the
Net Gain from Trade
International trade lowers the price of an imported good
and raises the price of an exported good.
Buyers of imported goods benefit from lower prices and
sellers of exported goods benefit from higher prices.
But some people complain about international competition:
not everyone gains.
Who wins and who loses from free international trade?

Net Gain from Trade
Gains and Losses from Imports
We can measure the gains and losses from imports by looking
at the effects on
1.The prices paid and quantity bought by domestic consumers
2.The price receives and the quantity sold by domestic
producers
Consumers gain from imports: Buyers pay a lower price
and buy more of the good.
Domestic producers lose from imports: Domestic
producers receive a lower price and sell a smaller quantity.

Net Gain from Trade
Gains and Losses from Exports
We can measure the gains and losses from exports by looking
at the effects on
1.The prices paid and quantity bought by domestic consumers
2.The price receives and the quantity sold by domestic
producers
Domestic consumers lose from exports: Consumers pay a
higher price and buy less of the good exported.
Domestic producers gain from exports: Producers receive
a higher price and sell a more of the good exported.

Gains for All

1.Domestic producers of the exported good and domestic
consumers of the imported good gain
2.Domestic producers of the imported good and domestic
consumers of the exported good lose
The gains exceed the losses:
Producers of the exported good gain what consumers lose and
gain more from the higher price on the items exported.
Consumers of the imported good gain what the domestic
producers lose and gain more from the lower price on the items
imported.

International Trade Restrictions
Governments restrict international trade to protect

domestic producers from competition.
Governments use four sets of tools:
 Tariffs
 Import quotas
 Other import barriers
 Export subsidies

Tariffs
A tariff is a tax on a good that is imposed by the importing
country when an imported good crosses its international
boundary.
For example, the government of India imposes a 100
percent tariff on wine imported from the United States.
So when an Indian wine merchant imports a $10 bottle of
California wine, the merchant pays the Indian government
$10 import duty.

The Effects of a Tariff

With free international trade, the world price of a T-shirt is
$5 and the United States imports 40 million T-shirts a year.
Imagine that the United States imposes a tariff of $2 on
each T-shirt imported.
The price of a T-shirt in the United States rises by $2.
Figure 15.5 shows the effect of the tariff on the market for
T-shirts in the United States.

Figure 15.3(a) shows the

market before the
government imposes the
tariff.
The world price of a
T-shirt is $5.
With free international
trade, the United States
imports 40 million T-shirts
a year.


effect of a tariff on
imports.
The tariff of $2 raises the
price in the United States
to $7 a T-shirt.
U.S. imports decrease to
10 million a year.
U.S. government collects
the tariff revenue of $20
million a year.

Winners, Losers, and Social Loss from a Tariff

When the U.S. government imposes a tariff on imported
T-shirts:
 U.S. consumers of T-shirts lose.
 U.S. producers of T-shirts gain.
 U.S. consumers lose more than U.S. producers gain:
Society loses.

U.S. Consumers of T-Shirts Lose

U.S. buyers of T-shirts now pay a higher price (the world
price plus the tariff), so they buy fewer T-shirts.
The combination of the higher price and the smaller
quantity bought makes U.S. consumers worse off.
So U.S. consumers lose from the tariff.

U.S. Producers of T-Shirts Gain

U.S. garment makers can now sell T-shirts for a higher
price (the world price plus the tariff), so they produce more
T-shirts.
The combination of the higher price and the larger quantity
produced increases the profit of domestic producers
So U.S. producers gain from the tariff.

U.S. Consumers Lose More than U.S. Producers Gain:

Society Loses
Consumers lose more from the tariff than domestic
producers of the imported good gain because
1.Consumers pay a higher price to domestic producers.
2.Consumers buy a smaller quantity of the good.
3.Consumers pay the tariff revenue collected by the
government.

The tariff revenue is a loss to consumers but not a social

loss because the government can use the revenue to buy
public services that people value.
The social loss arises because:
1.Some of the higher price paid to domestic producers
pays the higher cost of production.
The increased domestic production could
have been obtained at lower cost as an import.
2.The decreased quantity is bought at a higher price.

Import Quotas
An import quota is a restriction that limits the maximum
quantity of a good that may be imported in a given period.
For example, the United States imposes import quotas on
food products such as sugar and bananas and
manufactured goods such as textiles and paper.

The Effects of an Import

Quota
Figure 15.4(a) shows the
market before the
government imposes an
import quota on T-shirts.
The world price is $5.
The United States imports


market with an import quota
of 10 million T-shirts.
With the quota, the supply of
T-shirts in the United States
becomes S + quota.
The price rises to $15.
The quantity produced in the
United States increases and
the quantity bought
decreases.
Imports decrease.
Winners, Losers, and Social Loss from an Import

Quota
When the U.S. government imposes an import quota on
imported T-shirts:
 U.S. consumers of T-shirts lose.
 U.S. producers of T-shirts gain.
 Importers of T-shirts gain.
 Society loses.

U.S. Consumers of T-Shirts Lose

U.S. buyers of T-shirts now pay a higher price (the world
price plus the tariff), so they buy fewer T-shirts.
The combination of the higher price and the smaller
quantity bought makes U.S. consumers worse off.
So U.S. consumers lose when an import quota is imposed.

U.S. Producers of T-Shirts Gain

U.S. garment makers can now sell T-shirts for a higher
price (the world price plus the tariff), so they produce more
T-shirts.
The combination of the higher price and the larger quantity
produced increases the profit of domestic producers
So U.S. producers gain when an import quota is imposed.

Importers of T-shirts Gain

The importer buys the T-shirts in the world market at the
world price and sells them in the U.S. market at a higher
price.
The import gains from the import quota.

Society Loses
Society loses because the loss to consumers exceeds the
gain to domestic producers and importers.
Part of the social loss arises from the increase in the
domestic producers’ cost of production.
There is also a social loss from the decreased quantity
bought at the higher price.

Other Import Barriers

Thousands of detailed health, safety, and other regulations
restrict international trade.
Export Subsidies
An export subsidy is a payment made by the government
to a domestic producer of an exported good.
Export subsidies bring gains to domestic producers, but
they result in overproduction in the domestic economy and
underproduction in the rest of the world and so create a
deadweight loss.

The Case Against Protection
Despite the fact that free trade promotes prosperity for all
countries, trade is restricted.
Seven arguments for restricting international trade are that
protecting domestic industries from foreign competition
 Helps an infant industry grow.
 Counteracts dumping.
 Saves domestic jobs.
 Allows us to compete with cheap foreign labor.
 Penalizes lax environmental standards.
 Prevents rich countries from exploiting developing countries.
 Reduces offshore outsourcing that sends U.S. jobs abroad.

Helps an Infant Industry to Grow

Comparative advantages change with on-the-job experience
called learning-by-doing.
When a new industry or a new product is born—an infant
industry—it is not as productive as it will become with
experience.
It is argued that such an industry should be protected from
international competition until it can stand alone and
compete.
Learning-by-doing is a powerful engine of productivity
growth, but this fact does not justify protection.

Counteracts Dumping
Dumping occurs when a foreign firm sells its exports at a
lower price than its cost of production.
This argument does not justify protection because
1. It is virtually impossible to determine a firm’s costs.
2. It is hard to think of a global monopoly, so even if all
domestic firms are driven out, alternatives would still exist.
3. If the market is truly a global monopoly, it is better to
regulate the monopoly rather than restrict trade.

Saves Domestic Jobs

The idea that buying foreign goods costs domestic jobs is
wrong.
Imports destroy some jobs but create jobs for retailers that
sell the imported goods and for firms that service these
goods.
Free trade also increases foreign incomes and enables
foreigners to buy more domestic production.
Protection to save particular jobs is very costly.

Allows Us to Compete with Cheap Foreign Labor

The idea that a high-wage country cannot compete with a
low-wage country is wrong.
Low-wage labor is less productive than high-wage labor.
And wages and productivity tell us nothing about the
source of gains from trade, which is comparative
advantage.

Penalizes Lax Environmental Standards

The idea that protection is good for the environment is
wrong.
Free trade increases incomes and poor countries have
lower environmental standards than rich countries.
These countries cannot afford to spend as much on the
environment as a rich country can and sometimes they
have a comparative advantage at doing “dirty” work, which
helps the global environment achieve higher
environmental standards.

Prevents Rich Countries from Exploiting Developing

Countries
By trading with people in poor countries, we increase the
demand for the goods that these countries produce and
increase the demand for their labor.
The increase in the demand for labor raises their wage
rate.
Trade can expand the opportunities and increase the
incomes of people in poor countries.

Reduces Offshore Outsourcing that Sends U.S. Jobs Abroad

Offshore outsourcing occurs when a firm in the United States
buys finished goods, components, or services from firms in other
countries.
Despite the gain from specialization and trade that offshore
outsourcing brings, many people believe that it also brings costs
that eat up the gains. Why?
Americans, on average, gain from offshore outsourcing, but
some people lose.
The losers are those who have invested in the human capital to
do a specific job that has now gone offshore.

Why Is International Trade Restricted?

The key reason why international trade restrictions are
popular in the United States and most other developed
countries is an activity called rent seeking.
Rent seeking is lobbying and other political activity that
seeks to capture the gains from trade.
You’ve seen that free trade benefits consumers but shrinks
the producer surplus of firms that compete in markets with
imports.

Those who gain from free trade are the millions of

consumers of low-cost imports.
But the benefit per individual consumer is small.
Those who lose are the producers of import-competing
items.
Compared to the millions of consumers, there are only a
few thousand producers.
These producers have a strong incentive to incur the
expense of lobbying for a tariff and against free trade.

The gain from free trade for any one person is too small
for that person to spend much time or money on a political
organization to lobby for free trade.
Each group weighs benefits against costs and chooses the
best action for themselves.
But the group against free trade will undertake more
political lobbying than will the group for free trade.

Chapter 15 Lecture Presentation

Uploaded by

Copyright:

Available Formats

Chapter 15 Lecture Presentation

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 15 Lecture Presentation

Uploaded by

Copyright:

Available Formats

15 INTERNATIONAL

 Identify the gains from international trade and

 Explain the effects of international trade barriers

 Explain and evaluate arguments used to justify

© 2016 Pearson Education, Ltd.

Because we trade with people in other countries, the

© 2016 Pearson Education, Ltd.

International Trade Today

© 2016 Pearson Education, Ltd.

What Drives International Trade?

© 2016 Pearson Education, Ltd.

The opportunity cost of producing a T-shirt is lower in

© 2016 Pearson Education, Ltd.

Why the United States

© 2016 Pearson Education, Ltd.

Figure 15.1(b) shows the

© 2016 Pearson Education, Ltd.

With international trade, the

© 2016 Pearson Education, Ltd.

Why the United States

© 2016 Pearson Education, Ltd.

Figure 15.2(b) shows the

© 2016 Pearson Education, Ltd.

With international trade,

© 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd.

Gains for All

© 2016 Pearson Education, Ltd.

Governments restrict international trade to protect

© 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd.

The Effects of a Tariff

© 2016 Pearson Education, Ltd.

Figure 15.3(a) shows the

© 2016 Pearson Education, Ltd.

Figure 15.3(b) shows the

© 2016 Pearson Education, Ltd.

Winners, Losers, and Social Loss from a Tariff

© 2016 Pearson Education, Ltd.

U.S. Consumers of T-Shirts Lose

© 2016 Pearson Education, Ltd.

U.S. Producers of T-Shirts Gain

© 2016 Pearson Education, Ltd.

U.S. Consumers Lose More than U.S. Producers Gain:

© 2016 Pearson Education, Ltd.

The tariff revenue is a loss to consumers but not a social

© 2016 Pearson Education, Ltd.

© 2016 Pearson Education, Ltd.

The Effects of an Import

© 2016 Pearson Education, Ltd.

Figure 15.4(b) shows the

Winners, Losers, and Social Loss from an Import

© 2016 Pearson Education, Ltd.

U.S. Consumers of T-Shirts Lose

© 2016 Pearson Education, Ltd.

U.S. Producers of T-Shirts Gain

© 2016 Pearson Education, Ltd.

Importers of T-shirts Gain