Survey: Given the current employment

problems in this country, should we

discourage foreign imports and impose tariffs
and quotas in order to stimulate domestic
production?
1. Yes
2. No
3. Not sure
4. No opinion/indifferent
 Unit 10 - International Trade
 Free Trade versus Protectionism

Free trade is an exchange of products and

resources without trade barriers, restrictions,
tariffs, or quotas.

Protectionism is a government policy to

discourage trade between countries or areas.

Microeconomics
 Unit 10 - International Trade
 The Law of Absolute Advantages

A country has an absolute advantage in

producing a product if it can make it more
efficiently (at lower cost) than another country.

Microeconomics
 Unit 10 - International Trade
 Absolute Advantage Example

The following numbers represent hours of

production needed to manufacture one barrel of
oil and one watch.
China Venezuela

Oil 30 10
Watch 12 20
Microeconomics
 Unit 10 - International Trade
 Specialization

Venezuela produces 100 additional barrels of oil

(1,000 hours) and decreases watch production by 50
(1,000 hours).
China produces 100 additional watches (1,200 hours)
and decreases oil production by 40 (1,200 hours).
C V
Oil 30 10
Watch 12 20 Microeconomics
 Unit 10 - International Trade
 Specialization

Total world production increases by:

Venezuelan oil: +100
Chinese oil: - 40
Additional oil production:+ 60

Venezuelan watches: - 50
Chinese watches: +100
Additional watches + 50

Microeconomics
 Unit 10 - International Trade
 Specialization

Both countries use the same amount of

resources, but total world production increases.
After sharing (trading) the additional goods
produced, each country is able to increase its
standard of living.

Microeconomics
 If a country produces both products more
efficiently, then this country should:
1. Not trade at all with the
other country
2. Produce both products and
sell both products to the
other country
3. Specialize in the product it
produces most efficiently
4. None of the above
 Unit 10 - International Trade
 The Law of comparative advantages

A country has a comparative advantage in

producing a good when it produces a good
more efficiently relative to the production ratios
of the same goods produced by another
country.

Microeconomics
 Unit 10 - International Trade
 Comparative Advantage Example

The following numbers represent hours of

production needed to manufacture one barrel of
oil and one watch.

China Venezuela

Oil 30 10
Watch 40 20
Microeconomics
 Unit 10 - International Trade
 Specialization

Venezuela is more efficient (has the absolute

advantages) in producing both oil and watches.

Which country has the comparative advantage in

producing oil?
Which country has the comparative advantage in
producing watches?

Microeconomics
 Unit 10 - International Trade
 Comparative Advantage Example

Venezuela produces 100 additional barrels of oil (1,000 hours)

and decreases its watch production by 50 (1,000 hours).
China produces 60 additional watches (2,400 hours) and
decreases its oil production by 80 (2,400 hours).

China Venezuela

Oil 30 10
Watch 40 20
Microeconomics
 Unit 10 - International Trade
 Specialization

Total world production increases by:

Venezuelan oil: +100
Chinese oil: - 80
Additional oil production:+ 20

Venezuelan watches: - 50
Chinese watches: +60
Additional watches +10

Microeconomics
 Unit 10 - International Trade
 Specialization

Even in the case where one country is better at making all

goods, it pays for countries to specialize and trade.

Both countries use the same amount of resources, but total

world production increases. After sharing (trading) the
additional goods produced, each country is able to increase
its standard of living.

Microeconomics
 Unit 10 - International Trade
 Arguments against Free Trade

Common arguments against free trade are:

1. National security.
2. Infant industry.
3. Counteracting dumping or foreign subsidies.
4. Protecting domestic jobs.
5. Improving the trade deficit.

Microeconomics
 Unit 10 - International Trade
 National Security Argument

We should not import defense-related products

(weapons, micro chips) because if we become
enemies with the exporting country, we are
vulnerable.

Microeconomics
 Unit 10 - International Trade
 Critique of the National Security Argument

Trading defense related products with stable countries

serves as a deterrent against conflict.

We can import the product from a variety of countries.

We can produce many defense related products here as

well; it would not be difficult to increase production in
case of conflict.

Microeconomics
 Unit 10 - International Trade
 Infant Industry Argument

New industries are not as

cost-effective as established
industries.
We should protect domestic
industries if they are new.

Microeconomics
 Unit 10 - International Trade
 Critique of the Infant Industry Argument
Countries often protect their “infant” industries
longer than necessary.
Once tariffs and quotas are in place, they are
politically and economically difficult to
eliminate.
Competition, not protectionism, is what
strengthens industries.

Microeconomics
 Unit 10 - International Trade
 Counteracting Dumping and Foreign
Subsidies

If foreign countries subsidize their manufacturers (farming,

steel, etc.), they have an advantage.

Some foreign manufacturers “dump” (sell at below cost) their

products to establish a future monopoly situation in the market.

Tariffs and quotas will offset this unfair advantage.

Microeconomics
 Unit 10 - International Trade
 Critique of the Counteracting Dumping and
Foreign Subsidies Argument

If foreign countries subsidize their manufacturers,

or if companies dump their products, it results in
lower prices for our consumers. This gives us more
money to purchase products, including domestic ones.

Monopolies typically don’t charge high prices. A

monopoly will be challenged if the price is high. If they
do charge high prices, they don’t last.

Microeconomics
 Unit 10 - International Trade
 Protecting Domestic Jobs

Making foreign goods more

expensive through import restrictions,
makes domestic products relatively more
attractive.

Higher demand for our products will lead to more

employment.

Microeconomics
 Unit 10 - International Trade
 Critique of the Protecting Domestic Jobs
Argument
If we impose import restrictions to protect domestic
industries, other countries will do the same (retaliation),
and our exports will decrease.

Eventually, everyone will lose the advantages of free trade.

Protectionism results in less competition, less efficiency,

less production, higher prices, lower quality products, and
less variety of products for consumers.

Microeconomics
 Unit 10 - International Trade
 Improving the Trade Deficit

If we reduce our imports, then our trade deficit

will improve.

Microeconomics
 Unit 10 - International Trade
 Critique of the Improving the Trade
Deficit Argument

Restricting imports results in decreases in exports (see

previous argument), so the overall deficit will not
improve.

Overall productivity and wealth will decline because

of decreasing specialization and competition.

Microeconomics
 Unit 10 - International Trade
 Critique of the Improving the Trade Deficit
Argument (cont’d)

A trade deficit does not mean that a country is in debt. It means

that the merchandise part of the balance of payments is negative;
the other components are on balance, by definition, positive.

Trade deficits are not necessarily bad; they can be a sign of a

country’s strength.

Microeconomics
 Unit 10 - International Trade
 Less-developed Countries (LDCs)
Development Aid given to LDCs in 2010:
$128.7 billion ($30.2 billion by U.S.)
Africans living on less than $1.25 per day in
2009: 50% (was 58% in 1996)
Real GDP per capita in sub-Saharan Africa
(LDCs) in 2009 was less than $700.
 Source: Organization for Economic Cooperation and Development, World Bank
 Unit 10 - International Trade
 Less-developed Countries (LDCs)

Characteristics of LDCs include:

Lack of free market policies.
Improper domestic economic policies.
Government corruption.
Poor provision of public
services.

Microeconomics
 Unit 10 - International Trade
 Less-developed Countries (LDCs)

LDCs need structural changes in

their governments and economies.

No amount of financial help from industrialized

countries will significantly help their situation if
structural changes do not take place.

Microeconomics