Globalization International Trade and Regional Specialization Essay Read the following article How Globalization Sunk Many Americans Deeper in Debt (Links

Globalization International Trade and Regional Specialization Essay Read the following article How Globalization Sunk Many Americans Deeper in Debt (Links to an external site.).Why does the author say “free trade has been a double-edged sword for the US?” Do you agree with the author’s assertion? Explain your answer and support your response using concepts discussed in the textbook.APA FORMAT; USE POWERPOINT ATTACHED AND OTHER REFERENCES N. GREGORY MANKIW
PRINCIPLES OF
MICROECONOMICS
Eight Edition
CHAPTER
9
Application:
International Trade
PowerPoint Slides prepared by:
V. Andreea CHIRITESCU
Eastern Illinois University
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management system for classroom use.
1
The Determinants of Trade
• The equilibrium without trade
– Only domestic buyers and sellers
– Equilibrium price and quantity
• Determined on the domestic market
– Total benefits
• Consumer surplus
• Producer surplus
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2
Figure 1 Equilibrium without International Trade
Price of
textiles
Domestic
supply
Consumer
surplus
Equilibrium
Producer
price
surplus
Domestic
demand
0
Equilibrium
quantity
Quantity of textiles
When an economy cannot trade in world markets, the price adjusts to balance domestic
supply and demand. This figure shows consumer and producer surplus in an equilibrium
without international trade for the textile market in the imaginary country of Isoland.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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3
ASK THE EXPERTS
Trade Deals
“Past major trade deals have benefited most
Americans.”
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4
The Determinants of Trade
• Allow for international trade?
– Price and quantity sold in the domestic
market?
– Who will gain from free trade; who will
lose, and will the gains exceed the
losses?
– Should a tariff be part of the new trade
policy?
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5
The Determinants of Trade
• World price
– Price of a good that prevails in the world
market for that good
• Domestic price
– Opportunity cost of the good on the
domestic market
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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6
The Determinants of Trade
• Compare domestic price with world price
– Determine who has comparative
advantage
– If domestic price < world price • Export the good • The country has comparative advantage – If domestic price > world price
• Import the good
• The world has comparative advantage
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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7
Winners and Losers from Trade
• Exporting country
– Domestic equilibrium price before trade is
below the world price
– Once trade is allowed
• Domestic price rises to equal the world price
• Domestic quantity supplied is greater than
domestic quantity demanded
• The difference: exports
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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8
Figure 2 International Trade in an Exporting Country
Once trade is allowed, the domestic
price rises to equal the world price.
Price
Domestic The supply curve shows the quantity
of textiles
supply
of textiles produced domestically, and
Exports
the demand curve shows the quantity
A
Price
World
consumed domestically.
after trade
price
Exports from Isoland equal the
D
B
difference between the domestic
Price
quantity supplied and the domestic
before trade
quantity demanded at the world price.
Sellers are better off (producer surplus
C
Domestic rises from C to B + C + D), and buyers
demand are worse off (consumer surplus falls
Exports
from A + B to A). Total surplus rises by
an amount equal to area D, indicating
that trade raises the economic wellDomestic
Domestic
Quantity
0
being of the country as a whole.
quantity
quantity of textiles
demanded
supplied
The area D shows the
increase in total surplus
and represents the gains
from trade
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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9
Winners and Losers from Trade
• Exporting country
– Before international trade
• Consumer surplus
• Producer surplus
– With international trade
• Smaller consumer surplus
• Higher producer surplus
• Higher total surplus
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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10
Winners and Losers from Trade
• Exporting country, with international trade
– Domestic producers of the good are better
off
– Domestic consumers are worse off
– Trade raises the economic well-being of a
nation
• Gains of the winners exceed the losses of the
losers
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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11
Winners and Losers from Trade
• Importing country
– Domestic equilibrium price before trade is
above world price
– Once trade is allowed
• Domestic price drops to equal the world price
• Domestic quantity supplied is less than
domestic quantity demanded
• The difference: imports
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12
Figure 3 International Trade in an Importing Country
Once trade is allowed, the domestic
price falls to equal the world price. The
Price of
Domestic supply curve shows the amount
produced domestically, and the demand
textiles
supply
curve shows the amount consumed
domestically.
Imports equal the difference between
A
the domestic quantity demanded and
Price
the domestic quantity supplied at the
before trade
world price.
B
D
World Buyers are better off (consumer surplus
Price
rises from A to A + B + D), and sellers
price
after trade
are worse off (producer surplus falls
C
Domestic from B + C to C). Total surplus rises by
Imports
demand
an amount equal to area D, indicating
that trade raises the economic wellDomestic
Domestic Quantity being of the country as a whole.
0
quantity
quantity of textiles
supplied
demanded
The area D shows the
increase in total surplus
and represents the gains
from trade
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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13
Winners and Losers from Trade
• Importing country
– Before international trade
• Consumer surplus
• Producer surplus
– With international trade
• Higher consumer surplus
• Smaller producer surplus
• Higher total surplus
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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14
Winners and Losers from Trade
• Importing country, with international trade
– Domestic producers of the good are worse
off
– Domestic consumers are better off
– Trade raises the economic well-being of a
nation
• Gains of the winners exceed the losses of the
losers
• Trade can make everyone better off
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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15
Winners and Losers from Trade
• Tariff
– Tax on goods produced abroad and sold
domestically
• Free trade
– Domestic price = World price
• Tariff on imports
– Raises domestic price above world price
• By the amount of the tariff
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16
Figure 4 The Effects of a Tariff
Price of
textiles
Domestic
supply
A
Tariff
B
Price with tariff
C
Price without tariff
G
0
E
D
F
Imports
with tariff
Q1S Q2S
Q2D Q1D
Imports without tariff
World price
A tariff, a tax on imports,
reduces the quantity of
imports and moves a
market closer to the
equilibrium that would
exist without trade. Total
surplus falls by an
amount equal to area D +
F. These two triangles
represent the deadweight
loss from the tariff.
Domestic
demand
Quantity of
textiles
The area D + F
shows the fall in
total surplus and
represents the
deadweight loss
of the tariff.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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17
Winners and Losers from Trade
• The effects of a tariff
– Price rises by the amount of the tariff
– Domestic quantity demanded decreases
– Domestic quantity supplied increases
– Reduces the quantity of imports
– Moves the domestic market closer to its
equilibrium without trade
– Domestic sellers are better off
– Domestic buyers are worse off
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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18
Winners and Losers from Trade
• Before the tariff
– Consumer surplus
– Producer surplus
– Government tax revenue = 0
• The effects of a tariff
– Consumer surplus is smaller
– Producer surplus is bigger
– Government tax revenue
– Total surplus is smaller
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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19
Winners and Losers from Trade
• Other benefits of international trade
– Increased variety of goods
– Lower costs through economies of scale
– Increased competition
– Enhanced flow of ideas
• Transfer of technological advances around
the world
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20
Arguments for Restricting Trade
• The domestic producers
– Oppose free trade
– Believe that the
government should
protect the domestic
industry from foreign
competition
“You like protectionism as a
‘working man.’ How about as a
consumer?”
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21
Arguments for Restricting Trade
• The jobs argument
– “Trade with other countries destroys
domestic jobs”
– Free trade creates jobs at the same time
that it destroys them
• The national-security argument
– “The industry is vital for national security”
– When there are legitimate concerns over
national security
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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22
Arguments for Restricting Trade
• The infant-industry argument
– “New industries need temporary trade
restriction to help them get started”
– Difficult to implement in practice
– The “temporary” policy is hard to remove
– Protection is not necessary for an infant
industry to grow
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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23
Arguments for Restricting Trade
• The unfair-competition argument
– “Free trade is desirable only if all countries
play by the same rules”
– Increase in total surplus for the country
• The protection-as-a-bargaining-chip
argument
– “Trade restrictions can be useful when we
bargain with our trading partners”
– The threat may not work
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24
ASK THE EXPERTS
Trade Deals
“Refusing to liberalize trade unless partner
countries adopt new labor or environmental rules
is a bad policy, because even if the new standards
would reduce distortions on some dimensions,
such a policy involves threatening to maintain
large distortions in the form of restricted trade.”
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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25
Trade agreements and the WTO
• World Trade Organization, WTO
• Unilateral approach to achieve free trade
– Remove its trade restrictions on its own
– Great Britain, 19th century
– Chile and South Korea, recent years
• Multilateral approach to free trade
– Reduce its trade restrictions while other
countries do the same
– NAFTA, GATT
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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26
Trade agreements and the WTO
• North American Free Trade Agreement
(NAFTA)
– 1993, lowered trade barriers among the
United States, Mexico, and Canada
• General Agreement on Tariffs and Trade
(GATT)
– Continuing series of negotiations among
many of the world’s countries with the
goal of promoting free trade
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27
Trade agreements and the WTO
• GATT
– United States helped to found GATT
• After World War II
• In response to the high tariffs imposed during
the Great Depression
– Successfully reduced the average tariff
among member countries from about 40 to
5%
– Enforced by the WTO
– 2015: 162 countries; more than 97 % of
world trade
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
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28
Trade agreements and the WTO
• Advantages of the multilateral approach
– Potential to result in freer trade than
unilateral approach
• Reduce trade restrictions abroad and at
home
– Political advantage
• Producers are fewer and better organized
than consumers
• Greater political influence
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29

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