PRINCIPLE OF ECONOMIC
6 EDITION
KARL CASE, RAY FAIR
PRENTICE HALL BUSINESS PUBLISHING
COPY RIGHT 2002
International Trade
•
All economies, regardless of their size,
depend to some extent on other economies and are affected by events outside
their borders.
•
The “internationalization” or
“globalization” of the U.S. economy has occurred in the private and public
sectors, in input and output markets, and in business firms and households.
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.
•
David Ricardo’s theory of
comparative advantage , which he used to argue against the corn laws,
states that specialization and free trade will benefit all trading partners
(real wages will rise), even those that may be absolutely less efficient
producers.
Absolute Advantage
Versus Comparative Advantage
•
A country enjoys an absolute
advantage over another country in the production of a product if it
uses fewer resources to produce that product than the other country does.
•
A country enjoys a comparative
advantage in the production of a good if that good can be produced at a
lower cost in terms of other goods.
Gains from Comparative
Advantage
•
Even if a country had a considerable
absolute advantage in the production of both goods, Ricardo would argue that specialization
and trade are still mutually beneficial.
•
When countries specialize in producing
the goods in which they have a comparative advantage, they maximize their
combined output and allocate their resources more efficiently.
•
The real cost of producing cotton is the
wheat that must be sacrificed to produce it.
•
A country has a comparative advantage in
cotton production if its opportunity cost, in terms of wheat, is lower than the
other country.
Exchange Rates
•
When trade is free—unimpeded by
government-instituted barriers—patterns of trade and trade flows result from
the independent decisions of thousands of importers and exporters and millions
of private households and firms.
•
To understand these patterns we must
know something about the factors that determine exchange rates.
•
An exchange rate is the
ratio at which two currencies are traded.
The price of one currency in terms of another.
•
For any pair of countries, there is a
range of exchange rates that can lead automatically to both countries realizing
the gains from specialization and comparative advantage.
•
Exchange rates determine the terms of
trade.
•
If exchange rates end up in the right
ranges, the free market will drive each country to shift resources into those
sectors in which it enjoys a comparative advantage.
•
Only those products in which a country
has a comparative advantage will be competitive in world markets.
The Sources of Comparative
Advantage
•
Factor endowments
refer to the quantity and quality of labor, land, and natural resources of a
country.
•
Factor endowments seem to explain a
significant portion of actual world trade patterns.
•
The Heckscher-Ohlin theorem
is a theory that explains the existence of a country’s comparative advantage by
its factor endowments.
•
According to the theorem, a country has
a comparative advantage in the production of a product if that country is
relatively well endowed with inputs used intensively in the production of that
product.
•
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.
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.
•
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.
Economic Integration
•
Economic integration
occurs when two or more nations join to form a free-trade zone.
•
The European Union (EU) is
the European trading bloc composed of Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
Spain, Sweden, and the United Kingdom.
•
The U.S.-Canadian Free-Trade
Agreement is an agreement in which the United States and Canada agreed
to eliminate all barriers to trade between the two countries by 1988.
•
The North American Free-Trade
Agreement (NAFTA) is an agreement signed by the United
States, Mexico, and Canada in which the three countries agreed to establish all
of North America as a free-trade zone.
The North American
Free-Trade Agreement (NAFTA)
•
The U.S. Department of Commerce has
estimated that as a result of NAFTA trade between the United States and Mexico
increased by nearly $16 billion in 1994.
•
In addition, exports from the United
States to Mexico outpaced imports from Mexico.
•
By 1998, a general consensus emerged
among economists that NAFTA had led to expanded employment opportunities on
both sides of the border.
The Case for Free Trade
•
The case for free trade is based on the
theory of comparative advantage. When
countries specialize and trade based on comparative advantage, consumers pay
less and consume more, and resources are used more efficiently.
•
When tariffs and quotas are imposed, some
of the gains from trade are lost.
The Case for Protection
•
Protection saves jobs
•
Some countries engage in unfair trade
practices
•
Cheap foreign labor makes competition
unfair
•
Protection safeguards national security
•
Protection discourages dependency
•
Protection safeguards infant industries
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