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Principles of Economics, Ninth Edition N. Gregory Mankiw

PowerPoint Slides prepared by:

V. Andreea CHIRITESCU

Eastern Illinois University

N. Gregory Mankiw Principles Of Economics Ninth Edition

Chapter 9

Application: International Trade

The Determinants of Trade Part 1

The equilibrium without trade

Only domestic buyers and sellers

Equilibrium price and quantity

Determined on the domestic market

Total benefits

Consumer surplus

Producer surplus

Figure 1 Equilibrium without International Trade

ASK THE EXPERTS Part 1

Trade Deals

“Past major trade deals have benefited most Americans.”

The Determinants of Trade Part 2

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?

The Determinants of Trade Part 3

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

The Determinants of Trade Part 4

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

Winners and Losers from Trade Part 1

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

Figure 2 International Trade in an Exporting Country

Winners and Losers from Trade Part 2

Exporting country

Before international trade

Consumer surplus

Producer surplus

With international trade

Smaller consumer surplus

Higher producer surplus

Higher total surplus

Winners and Losers from Trade Part 3

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

Winners and Losers from Trade Part 4

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

Figure 3 International Trade in an Importing Country

Winners and Losers from Trade Part 5

Importing country

Before international trade

Consumer surplus

Producer surplus

With international trade

Higher consumer surplus

Smaller producer surplus

Higher total surplus

Winners and Losers from Trade Part 6

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

Winners and Losers from Trade Part 7

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

Figure 4 The Effects of a Tariff

Winners and Losers from Trade Part 8

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

Winners and Losers from Trade Part 9

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

Winners and Losers from Trade Part 10

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

Arguments for Restricting Trade Part 1

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?”

Arguments for Restricting Trade Part 2

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

Arguments for Restricting Trade Part 3

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

Arguments for Restricting Trade Part 4

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

ASK THE EXPERTS Part 2

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.”

Trade Agreements and the WTO Part 1

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

Trade Agreements and the WTO Part 2

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

Trade Agreements and the WTO Part 3

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

2018: 164 countries; more than 97 % of world trade

Trade Agreements and the WTO Part 4

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