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CHAPTER 35 -- Part 1: INTERNATIONAL TRADE
You should know LO1 after reading this chapter.
What is the comparative advantage?
There are gains from trade.
Prices, output, and incomes are affected by trade barriers.
The players wore shoes made in Korea or China in this chapter.
What goods and services we trade with.
Imported goods have made inroads into other activities.
The arguments for and against international have been produced in the United States.
Some conclusions are drawn about trade policy.
The United States is the largest player in global product and resource markets.
We purchased 20 percent of the world's exports and sold 15 percent of them.
Our imports in 2006 were more than $2 trillion.
Table 35.1 shows the goods and services we purchase from foreign suppliers.
Coffee is an example.
Almost all coffee is imported.
There would be no aluminum, no chrome bumpers, no tin cans, and a lot fewer computers without imported components if we didn't import them.
Baseballs are no longer made in the United States so we couldn't play the game without imports.
If you fly to Europe on Virgin Airways, you'll get transportation services.
If you stay in a London hotel, you'll get lodging services.
Foreign financial services are imported when you use the cash traveler's checks at the bank.
These and other services make up one sixth of U.S. imports.
Goods and ser vices are sold to foreign buyers.
Many of the same goods we import are made from iron ingots and oxides.
What is the purpose of trading goods?
Saudi Arabia is dependent on its oil exports.
Our relative self-sufficiency in food and resources is reflected in the relatively low U.S. export ratio.
European nations are interdependent.
We exported $431 billion of services.
The United States is the largest exporter of goods and services in the world.
Other nations export much larger proportions of their GDP.
Belgium is one of the most export-oriented countries, with tourist services and diamond exports pushing its export ratio to an incredible 84 percent.
By contrast, theBurma is a closed economy, with few exports other than opium and other drugs traded in the black market.
We export 25 to 50 percent of our rice, corn, and wheat production each year.
Find the most recent trends in U.S. agricultural products.
McDonald's sells hamburgers to over 50 million people a day in 128 countries around the world, and the company exports management and marketing services from the United States.
The most popular TV shows in Russia and Germany are produced by The Walt Disney Company, as well as Italy's best-selling weekly magazine and the most popular tourist attraction in Japan.
5 billion dollars of American educational services are purchased by 500,000 foreign students at U.S. universities.
America's service exports include these activities.
Although we export a lot of products, we usually have an unbalanced trade flow.
Goods and services are traded.
An overall trade deficit remained in 2006
We had a negative trade balance in 2006 because we imported more than we exported.
The bilateral balances in our trade accounts vary greatly.
Our 2006 aggregate trade deficit included huge bilateral trade deficits with Japan and China.
It might seem odd to import goods that we could make ourselves.
The same considerations that motivate individuals to specialize in production lead to our decision to trade with other countries.
You can enjoy a higher standard of living if you work one job and buy other goods in the marketplace.
You're no longer self-sufficient when you do that.
The production possibilities of two countries will be examined to see how nations benefit from trade.
We want to show that if two countries trade, they can produce more output than if they don't.
We would have to devote all of our resources to that.
In the absence of contact with the outside world, the production possibilities curve for a closed trade.
A country can't consume more than it produces without imports.
The country could consume a certain amount of food.
They consume 9 loaves of bread and 24 barrels of wine.
We want to know if world output would increase if France and the US started trading.
In the absence of trade, a country's consumption possibilities are the same as its production possibilities.
The production possibilities of the United States and France are shown in graphs and schedules.
Each country wants to increase its consumption beyond these levels.
It is possible since it is on the production possibilities curve.
The mix of output in France could be changed.
There are two observations that need to be made.
The output mixes have changed in each country.
More of the good is what it produces best.
14 million loaves of bread and 14 million barrels of wine have been added to the world's output.
Changing the mix of output in each country has increased world output.
The potential for making both countries better off than they were in the absence of trade is created by this additional output.
We could be the first to discover the benefits of trade.
We will give them 6 million loaves of bread in exchange for 20 million barrels of wine.
France has domestic production possibilities.
The French will be happy with the extra output they get from trading.
6 million loaves are exported to France.
We have 54 million loaves of bread to eat.
The French give us 20 million barrels of wine in return for bread.
We are better off because of international trade.
The table shows the gains from trade.
U.S. imports and French exports are similar.
The trade-facilitated consumption in each country exceeds no-trade levels.
The gains from trade are due to specialization in production.
When each country goes it alone, it's a prisoner of its own production possibilities curve, and must make production decisions on the basis of its own consumption desires.
Each country can concentrate on exploiting its production capabilities when international trade is allowed.
Each country trades with other countries to get the goods it wants to consume.
When nations specialize in production, they can export to other countries.
Each country is able to escape the confines of its own production possibilities curve to reach beyond it for a larger basket of consumption goods.
Consumption possibilities are always greater than production possibilities when a country engages in international trade.
There would be no incentive for trading if it weren't possible for countries to increase their consumption.
It's not obvious which goods should be traded or what terms.
The United States traded bread for wine in a way that was favorable to us.
We pay half a barrel of wine to get a loaf of bread.
In France, the cost of bread production is higher than in the United States.
The French must use factors of production that could be used to produce other goods or services in order to obtain a loaf of bread.
The nature of comparative advantage is exposed by a comparison of opportunity costs.
The United States has a comparative advantage in bread production because it takes less wine to make bread in the US than it does in France.
The opportunity costs of bread production in the United States are lower than in France.
The relative costs of producing certain goods are referred to as comparative advantage.
The United States should produce bread because its opportunity cost is less than France's.
If you were the production manager for the world, you would want each country to maximize world output.
The same decision can be arrived at by comparing the opportunity costs of each country.
When each country pursues its comparative advantage, world output will be maximized.
Each country exports goods that involve relatively low domestic opportunity costs and imports goods that involve high domestic opportunity costs.
That's the kind of situation depicted in the table.
We can try to emulate it, but it shouldn't affect our pro more than other countries.
We have an advantage in producing bread if we can get a barrel of wine for less in trade.
We don't care if France could produce either good or bad with less resources.
The costs of production were not included because they were irrelevant.
This example shows the difference between absolute advantage and comparative advantage.
He was the fastest runner on the football team when he joined the Warriors.
He was able to throw the ball farther than most people could see.
The greatest quarterback or end ever to play football would have been Charlie.
He could only play one position at a time.
The coach had to play Charlie either as a quarterback or an end.
Charlie could throw a bit farther than some of the other top quarterbacks but he could far outdistance them.
It makes sense to focus on production in order to have a comparative advantage.
We don't yet know how we got such a good deal with France.
In our previous illustration, the terms of the amount of good A given up trade were very favorable to us; we exchanged only 6 million loaves of bread for 20 million.
6 loaves 20 barrels were the terms of trade.
6 loaves for 20 barrels was an improvement over France's domestic opportunity costs.
Getting bread via trade was cheaper for France than it was at home.
France had an extra 4 million barrels of wine.
Each country's domestic opportunity costs are the first clue to the terms of trade.
Unless the terms of trade are better than domestic opportunities, a country won't trade.
The opportunity cost of a barrel of wine in the US is 2 loaves of bread.
We won't export bread unless we get at least 1 barrel of wine in exchange for every 2 loaves of bread we ship overseas.
All countries want to make money from trade.
A loaf of bread in international trade will be worth at least 1-2 barrels of wine, but no more than 4 barrels.
The terms of trade ended up at 1 loaf 3.33 barrels.
This was a big gain for the United States and a small gain for France.
Direct negotiations between countries are not subject to much trade.
Consumers and producers don't like comparative advantage.
Market participants try to allocate their resources in order to maximize profits or personal satisfaction.
Consumers tend to buy products that deliver the most utility per dollar of expenditure, while producers try to get the most output per dollar of cost.
Everyone is looking for a bargain.
It is possible that Henri visited the United States before the advent of international trade.
Consumption possibilities are increased by trade.
We could trade 15 million loaves of bread for 60 million barrels of wine if we continued to produce 100 million loaves of bread.
The terms of trade determine how the gains from trade are distributed.
The price of bread and wine in France is different to the price in the US.
The chance for making a fast euro was brought to his attention by these price comparisons.
He just had to trade some French wine for bread in the United States.
He could return to France and exchange bread for wine.
He'd make a lot of money if he did this a few times.
Henri's entrepreneurial exploits will move each country towards its comparative advantage.
The United States ends up exporting bread to France, while France ends up exporting wine to the United States.
Consumers and producers in each country have aided and encouraged him.
They end up paying less for wine than they would otherwise have to.
The Henri offers are more attractive than the domestic prices.
Henri's welcome is equally warm on the other side of the Atlantic.
French consumers can get a better deal if they trade their wine for imported bread.
Some producers are happy.
The wheat farmers and bakers in the United States want to deal with Henri.
He is willing to pay a premium price for bread.
In the United States, bread production has become so profitable that a lot of people who used to grow grapes are now growing wheat and kneading dough.
There is a different kind of production shift taking place in France.
French wheat farmers are planting more grape vines to take advantage of Henri's generous purchases.
Henri is able to lead each country in the direction of its comparative advantage while raking in a substantial profit for himself along the way.
The terms of trade and the volume of exports and imports depend on how good a trader Henri is.
It will depend on the behavior of thousands of individual consumers and producers who participate in the market exchanges.
The supply and demand for bread and wine in each country affect trade flows.
The price of any good depends on the willingness of market participants to buy or sell.
The terms of trade will end up between the limits set by each country's opportunity costs.
The potential gains from world trade are impressive, but not everyone will be happy at the Franco-American trade celebration.
Some people will be upset about Henri's trade routes.
They will try to discourage us from continuing to trade with France by boycotting the celebration.
Consider the winegrowers in western New York.
We may hear about unfair foreign competition or the benefits of American grapes.
California wine grape growers are growing more and more and angry at each market percentage point gain of for includes record bulk, inexpensive wine imports that are being eign wine in the U.S.
By the end of the year, wine imports are the same as American wine.
The growers are ripping out vineyards.
Some of that bright future is being taken by imports.
The Central Valley has been destroyed in the last five years.
Growers don't like prices that are less than production costs.
Permission was granted for this article to be reproduced.
Domestic industry competes with imports, which increases consumption possibilities.
The affected industries want to keep their jobs and incomes.
In case of terrorist attacks, New York winegrowers may emphasize the importance of maintaining an adequate grape supply and a strong wine industry at home.
The farm workers and merchants who depend on the New York wine industry will be with the growers.
The growers will get the governor of the state to join their demonstration if they are clever.
The wheat farmers in Kansas who are making a bundle from international trade are not included in the governor's people.
Lower wine prices are good for New York consumers, but they're not likely to demonstrate over a few cents a bottle.
The few extra pennies translate into millions of dollars for domestic wine producers.
Winegrowers in the United States are not as happy about international trade as the wheat farmers in France are.
They would love to sink all those boats that bring wheat from America.
Some producers want to restrict international trade.
This explains why GM, Ford, and Chrysler are unhappy about auto imports and why workers in Massachusetts want to end the import of Italian shoes.
Textile producers in South Carolina think China is acting irresponsibly when it sells cotton shirts and dresses in the United States.
Increased jobs and income for other industries can be achieved by exports, even if imports mean fewer jobs and less income for some domestic industries.
Trade benefits producers and workers.
There are identifiable gainers and losers from international trade.
Income from import-competing industries is redistributed to export industries.
The source of political and economic discontent is potential redistribution.
The gains from trade are more than the losses.
It's not just a question of taking Peter and giving him to Paul.
Consumers enjoy a higher standard of living as a result of international trade.
Trade increases world efficiency and total output.
We end up slicing up a larger pie instead of just cutting the same old smaller pie.
The gains from trade won't matter to workers who end up with a smaller slice of the pie.
The gains from trade are large enough to make everyone better off.
The question of whether we choose to distribute the gains from trade in this way is a separate one.
We have a smaller pie because of trade restrictions.
Expansion of international trade is hampered by import-competing industries.
There are other sources of trade restrictions.
Other arguments can be used to restrict trade.
There is a national security argument for trade restrictions.
It is said that we can't depend on foreign suppliers for defense-related goods because they would leave us vulnerable in a war.
This argument was used by the machine tool industry.
If weapons manufacturers relied on imported lathes, milling machines, and other tools, the Pentagon would not have a contingency plan in case of war.
According to trade experts, the Chinese government charged it with selling optical-fiber.
China has brought about 25 dump China will have to pay a 16% deposit on the purchase price of ing cases against foreign companies, according to a King & the company's products, starting immediately.
That amount of money was estimated by Spalding.
U.S. companies will be held in an account until the matter is resolved.
The recent U.S. trade actions against China were reproduced with the permission of the DOW.
Congress protects the nation's food supply with additional subsidies.
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