INTERNATIONAL TRADE

IS THE EXCHANGE OF CAPITAL,

GOODS AND SERVICES ACROSS
INTERNATIONAL BOARDERS OR
TERRITORIES, WHICH COULD
INVOLVE THE ACTIVITIES OF THE
GOVERNMENT AND INDIVIDUAL. IN
MOST COUNTRIES, SUCH TRADE
REPRESENTS A SIGNIFICANT SHARE
OF GROSS DOMESTIC
PRODUCT(GDP)
COMPARATIVE
ADVANTAGE: GRAPHICAL
ANALYSIS
 IMPLICIT IN WHAT WE
HAVE BEEN SAYING IS
THE PRINCIPLE OF
COMPARATIVE
ADVANTAGE, DESCRIBE
THROUGH PRODUCTION
POSSIBILITIES TABLES IN
CHAPTER 5.
TWO ISOLATED NATIONS
- CONSTANT COSTS

- DIFFERENT COSTS

- U.S. ABSOLUTE ADVANTAGE IN

BOTH
SPECIALIZING BASED ON
COMPARATIVE ADVANTAGE
Count (1) (2) (3) (4) (5) Gain
ry Outputs Outputs Amounts Outputs from
before after Exported Available Specializ
Specializ specializ (-) and after ation
ation ation Imported Trade and
(+) Trade
(4)-(1)
United 18 Wheat 30 Wheat -10 Wheat 20 Wheat 2 Wheat
States

12 Coffee 0 Coffee + 15 15 Coffee 3 Coffee

Coffee

Brazil 8 Wheat 0 Wheat +10 10 Wheat 2 Wheat

Wheat
4 Coffee 20 Coffee -15 Coffee 5 Coffee 1 Coffee
TERMS OF TRADE
GAINS FROM TRADE
 45

40

35
Trading possibilities line
C 30
O
F 25
F
E 20
E
(tons) 15

10

0 5 10 15 20 25 Wheat (tons)
30 (a)
United States
 30

25

Coffee 20
Trading possibilities line
(tons)
15

10
5

0 5 10 15 20

Wheat (tons)
(b)
Brazil
- TRADE WITH INCREASING
COST
 THE CASE FOR FREE TRADE
THE CASE FOR FREE TRADE
REDUCES TO ONE COMPELLING
ARGUMENT: THROUGH FREE
TRADE BASED ON THE PRINCIPLE
OF COMPARATIVE ADVANTAGE,
THE WORLD ECONOMY CAN
ACHIEVE A MORE EFFICIENT
ALLOCATION OF RESOURCES AND
HIGHER LEVEL OF MATERIAL WELL-
BEING THAN IT CAN WITHOUT
FREE TRADE
SUPPLY AND DEMAND
ANALYSIS OF EXPORTS AND
IMPORTS
 - SUPPLY AND DEMAND
ANALYSIS REVEALS HOW
EQUILIBRIUM PRICES AND
QUANTITIES OF EXPORTS
AND IMPORTS DETERMINED.
 DOMESTIC SUPPLY AND DEMAND
DETERMINED THE EQUILIBRIUM
DOMESTIC PRICE-THE PRICE THAT
WOULD PREVAIL IN A CLOSED
ECONOMY THAT DOES NOT
ENGAGE IN INTERNATIONAL TRADE.
THE DOMESTIC PRICE EQUATES
QUANTITY SUPPLIED AND QUANTITY
DEMANDED DOMESTICALLY.
SUPPLY AND DEMAND
IN UNITED STATES
SUPPLY AND DEMAND IN
CANADA
 EQUILIBRIUM WORLD
PRICE, EXPORTS, AND
IMPORTS
TRADE BARRIERS

NO MATTER HOW
COMPELLING THE CASE
FOR FREE TRADE,
BARRIERS TO FREE
TRADE DO EXIST.
TARIFFS– TAXES ON IMPORTED
GOODS
REVENUE TARIFF – USUALLY APPLIED
TO A PRODUCT THAT IS NOT BEING
PRODUCED DOMESTICALLY.
PROTECTIVE TARIFF-DESIGNED TO
SHIELD DOMESTIC PRODUCERS
FROM FOREIGN COMPETITION.
IMPORT QUOTA- SPECIFIES THE
MAXIMUM AMOUNT OF A COMMODITY
THAT MAY BE IMPORTED IN ANY
PERIOD.
NONTARIFF BARRIER (NTB)-REFERS
EITHER TO A LICENSING
REQUIREMENT THAT SPECIFIES
UNREASONABLE STANDARDS
PERTAINING TO PRODUCT QUALITY
AND SAFETY , OR TO UNNECESSARY
BUREAUCRATIC RED TAPE THAT IS
USED TO RESTRICT IMPORTS.
VOLUNTARY EXPORT RESTRICTION
(VER)-TRADE BARRIER BY WHICH
FOREIGN FIRM “VOLUNTARILY” LIMIT
THE AMOUNT OF THEIR EXPORTS TO A
PARTICULAR COUNTRY.
ECONOMIC IMPACTS
OF TARIFF
DIRECT EFFECTS
SUPPOSE NOW THAT THE
UNITED STATES IMPOSE A
TARIFF ON EACH IMPORTED
DVD PLAYER. THE TARIFF,
WHICH RAISES THE PRICE OF
IMPORTED PLAYERS FROM P(W)
TO P (N) HAS FOUR EFFECTS :
* DECLINE IN CONSUMPTION
* INCREASED DOMESTIC PRODUCTION
* DECLINE IN IMPORTS
* TARIFF REVENUE
INDIRECT EFFECT

TARIFFS HAVE A SUBTLE

EFFECT BEYOND WHAT
OUR SUPPLY AND
DEMAND DIAGRAM CAN
SHOW.
THE CASE FOR
PROTECTION
 DESPITE THE LOGIC OF
SPECIALIZATION AND
TRADE, THERE ARE STILL
PROTECTIONIST’S IN
SOME UNION HALLS,
CORPORATE
BOARDROOMS, AND
CONGRESSIONAL
CONFERENCE ROOMS.
 WHAT ARGUMENTS
DO PROTECTIONIST’S
MAKE TO JUSTIFY
TRADE BARRIERS ?
* MILITARY SELF-SUFFICIENCY
ARGUMENT
* DIVERSIFICATION-FOR
STABILITY-ARGUMENT
* INFANT INDUSTRY ARGUMENT
* PROTECTION-AGAINST-
DUMPING ARGUMENT
* INCREASED DOMESTIC
EMPLOYMENT ARGUMENT
* CHEAP FOREIGN LABOR
ARGUMENT
THE WORLD
TRADE
ORGANIZATION
IT PROVIDES FORUMS
FOR FURTHER ROUNDS
OF TRADE
NEGOTIATIONS