Today
International trade
Return of exams
Chapter 33
International Trade
Comparative Advantage
A country has a comparative advantage in
producing a good if it can produce it at a
lower opportunity cost than another country.
Your country might have a lower opportunity
cost because:
it is more talented at making the good, or
the good uses resources which are relatively
abundant in your country.
Comparative Advantage and
Trade
Countries will export goods in which
they have a comp. adv.
Countries will import goods in which
they do not have a comp. adv.
This is efficient because every country
gets to have the good for the lowest
available opportunity cost.
Example: India and the US
Compare ability to make cars and clothing.
The opportunity cost of making a car is the
clothing foregone (& vice versa).
Suppose India uses 50% more resources to
make cars but only 20% more resources to
make clothing, compared to the US.
The opportunity cost of producing clothing is
lower in India, because you give up fewer
cars there than you would in the US.
What if your country has no
comparative advantage?
Unlikely--remember comparative advantage is
defined by opportunity cost, not absolute
cost.
It is defined by the value of foregone
production, not by the amounts resources
used.
But, if you have no comparative advantage,
then you are neither helped not hurt by
trade.
Productivity and Comparative
Advantage
Consider Japan and the US.
What if Japanese workers are more
productive than the US?
Japanese workers will be able to
consume more than US workers, with or
without trade.
Productivity and Comparative
Advantage, Cont’d.
Even though Japan can produce
everything with fewer resources, the US
will still be able to make something
relatively cheaper.
The US can still increase its
consumption through trade with Japan-it can import some goods more cheaply
than it can make them at home.
Bottom Line
Productivity & resources determine a
country’s wealth.
Trade increases that wealth.
Income Redistribution
While trade can increase total
consumption, not everyone benefits.
Trade helps . . .
. . . factors used to produce exports.
Increased demand for these factors
pushes up their incomes.
Trade hurts . . .
. . . factors used to produce imports.
Decreased demand for these factors
pushes down their incomes.
Net
Gains by winners are larger than losses
by losers.
(More consumption in total.)
Economists’ support of free trade is
based on this net gain.
Artificial Barriers to Trade
Import tariff--a tax on imports.
Import quota--a legal max. amount that
may be imported.
Regulations--Product standards or
health & safety regulations may make
trade impractical.
Import Tariffs
Like a sales tax, an import tariff forces
up the price of a good.
Consumers buy less.
Domestic producers produce more.
Imports fall.
Effects of Tariff
Consumers are hurt.
Producers (owners of the factors used
to produce the good) are helped.
Trade is reduced.
Net: The losses outweigh the gains,
because trade is reduced.
Political Economy
Why is there trade protection?
Consumers are many, each lose a little.
Producers are few, each gain a lot.
Producers tend to organize to lobby for
trade protection.
Arguments for Protection
National Defense
Argument (A): “Must have a functioning
“_____” industry in case of war.”
Counterargument (CA): Many of the
industries that use this argument are
not really crucial for war.
Infant Industry Argument
A: “Our industry could be competitive if
given a chance to mature.”
CA: The industry may not become
competitive because it is protected.
CA: Politically difficult to remove
protection once it is started.
Unfair Competition
A: “Foreign producers use really cheap
labor. It’s unfair to expect us to
compete.”
CA: Why not take advantage of cheap
foreign labor? Use American labor only
on goods in which it has a comparative
advantage.
Dumping
A: “Foreign producers sell their products
in America for less than they sell them
at home.”
CA: That’s good for US consumers.
Only a problem if US firms driven out of
business and replaced by a foreign
monopolist (unlikely).
Bottom Line
There is seldom an economic
justification for barriers to trade.
Industries use these arguments to
further their own interests at the
expense of consumers.
Bottom Line
The economy will use its resources
most efficiently if it lets comparative
advantage determine where they are
used.
Industries will rise or decline over time
as comparative advantage changes.
Coming Up:
Review for final exam
Bring along your old copies of study guides
Final Exam:
Tuesday, May 7; 9:00-11:00; note later
start time.
Bring pencil, calculator, knowledge of
economics, .