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International Trade, Comparative Advantage, and Protectionism
International Trade, Comparative Advantage, and Protectionism
International Trade,
Comparative Advantage, and
Protectionism
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
International Trade
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Trade Surpluses and Deficits
U.S. Balance of Trade (Exports Minus Imports), 1929 1999 (Billions of Dollars)
EXPORTS MINUS IMPORTS EXPORTS MINUS IMPORTS
1929 + 0.4 1984 102.0
1933 + 0.1 1985 114.2
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Economic Basis for Trade:
Comparative Advantage
Corn Laws were the tariffs, subsidies, and
restrictions enacted by the British Parliament
in the early nineteenth century to discourage
imports and encourage exports of grain.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Mutual Absolute Advantage
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Mutual Absolute Advantage
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Production Possibility Frontiers for Australia
and New Zealand Before Trade
Wheat 100 acres x 6 bu/acre 75 acres x 2 bu/acre 300 bushels 300 bushels
600 bushels 150 bushels
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Gains from Specialization
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Gains from Comparative Advantage
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Gains from Comparative Advantage
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Gains from Comparative Advantage
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Gains from Comparative Advantage
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Gains from Comparative Advantage
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Gains from Comparative Advantage
(after trade)
200 bushels (trade)
(after trade)
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Gains from Comparative Advantage
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Exchange Rates
Timber $1 3 Reals
Rolled steel $2 4 Reals
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Exchange Rates
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Sources of
Comparative Advantage
Factor endowments refer to the quantity
and quality of labor, land, and natural
resources of a country.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Sources of
Comparative Advantage
The Heckscher-Ohlin theorem is a theory
that explains the existence of a countrys
comparative advantage by its factor
endowments.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Sources of
Comparative Advantage
Product differentiation is a natural response
to diverse preferences within an economy,
and across economies.
Some economists also distinguish between
acquired comparative advantage and
natural comparative advantages.
Economies of scale may be available when
producing for a world market that would not
be available when producing for a limited
domestic market.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Trade Barriers: Tariffs,
Export Subsidies, and Quotas
Protection is the practice of shielding a
sector of the economy from foreign
competition.
A tariff is a tax on imports.
Export subsidies are government payments
made to domestic firms to encourage exports.
Closely related to subsidies is dumping. A
firm or industry sells products on the world
market at prices below the cost of production.
A quota is a limit on the quantity of imports.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Trade Barriers: Tariffs,
Export Subsidies, and Quotas
The Smoot-Hawley tariff was the U.S. tariff
law of the 1930s, which set the highest tariff in
U.S. history (60 percent). It set off an
international trade war and caused the decline
in trade that is often considered a cause of the
worldwide depression of the 1930s.
The General Agreement on Tariffs and
Trade (GATT) is an international agreement
singed by the United States and 22 other
countries in 1947 to promote the liberalization
of foreign trade.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Economic Integration
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Economic Integration
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Gains from Trade
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Losses from the
Imposition of a Tariff
The loss of efficiency
from a $1 tariff has two
components:
1. Consumers must pay a
higher price for goods
that could be produced
at a lower cost.
2. Marginal producers are
drawn into textiles and
away from other goods,
Government revenue
resulting in inefficient
equals the shaded area.
domestic production.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Case for Protection
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair