Bisnis

International Trade
MB
MC
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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
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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
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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
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Production Possibilities
Curve for a Many-Worker Economy
A
Coffee (pounds/year)
100,000
40,000
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
B
1,000
2,000
Computers (number/year)
Slide 5
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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
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In a closed economy:
Societys
production possibilities =
consumption possibilities.
If a country is self-sufficient, it is called
autarky.

Slide 7
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In an open economy:
The
societys consumption possibilities are

typically greater than its production
possibilities.

Slide 8
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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
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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
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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
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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
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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
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A Straight-Line Production
Possibilities Curve
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
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Two Consumption Possibilities Curves
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
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Two Consumption Possibilities Curves
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
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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
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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
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Economic Naturalist
Does
cheap foreign labor pose a danger

to high-wage economies?

Slide 19
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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
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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
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The Market for

Computers in Costa Rica
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
4,800
400
Domestic
demand
1,200
2,000 2,800
Computer per year
With Trade
Slide 22
4,800
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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
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The Market for

Coffee in Costa Rica
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
Domestic
demand
100,000
Without Trade
240,000
Coffee exports
Domestic
demand
40,000 100,000
200,000 240,000
With Trade
Slide 24
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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
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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
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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
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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
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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
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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
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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
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the 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
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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
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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
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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
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the 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
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the 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
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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
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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
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A Supply and Demand

Other Barriers to Trade

Red-tape
barriers
Regulations

Slide 41
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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
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Outsourcing
Outsourcing
A term
increasingly used to connote having

services performed by low-wage workers
overseas

Slide 43
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Outsourcing
Outsourcing
Outsourcing
of services to low-wage foreign

workers is exactly analogous to the
importation of goods manufactured by lowwage foreign workers.

Slide 44
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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
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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
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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

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International Trade

Understanding the Economic Issues of

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

The principle of comparative advantage

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption

economy that does not trade with the

economy that trades with other

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Chapter 9: International Trade

Production and Consumption

A countrys PPC shows the quantities of

combinations of goods and services

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption

societys consumption possibilities are

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,

Chapter 9: International Trade

Production Possibilities, Consumption Possibilities,

Chapter 9: International Trade

Chapter 9: International Trade

Two Consumption Possibilities Curves

Consumption possibilities curve

Chapter 9: International Trade

Two Consumption Possibilities Curves

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Consumption Possibilities With

What Do You Think?

should Islandia produce if the price

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Consumption Possibilities With

a bow-shaped PPC consumption

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption

cheap foreign labor pose a danger

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption

and Fredonia produce software and beef.

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

Production and Consumption

has a comparative advantage in beef.

Copyright c 2007 by The McGraw-Hill

Chapter 9: International Trade

The Market for