Intro to Economics - Trade

7/31/2019 Intro to Economics - Trade

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International Trade

Dr. Katherine Sauer

A Citizens Guide to Economics

ECO 1040


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Overview:

I. Why do Nations Trade?II. Trade Pattern

III. Trade Balance

IV. Trade Barriers

V. Free Trade

VI. Fair Trade


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Productivity is what makes us rich.

Specialization is what makes us productive.

Trade allows us to specialize.


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I. Why do nations trade?

Why do nations export?- individuals/firms produce more than can be consumed at

home

- sellers could receive a higher price in a foreign market

Why do nations import?

- some goods cant be produced at home (or not enough)- some goods are produced at a lower cost or more

efficiently elsewhere

- consumers like variety


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Due to differences in supply conditions, a country may be

able to produce more of a good at a lower cost.

- superior technology- large factor (resource) endowments

Absolute advantage is the ability to produce a good at the

lowest cost.

It implies a potential trade pattern.

ex: tropical countries produce and export bananas

coastal countries produce and export seafood

It gives an incentive to specialize in the production of a

particular good and export it.


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Absolute advantage alone is not sufficient to fully explain

international trade.

- The opportunity cost ofproducing an item may

exceed the cost oftrading for it.

International trade is based on comparative advantage.

Comparative Advantage is the ability to produce at thelowest opportunity cost.


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Countries with a relative abundance oflow-skilled labor

tend to specialize in and export items having low-skilled

labor as a major cost component.

Countries with a relative abundance ofcapital tend tospecialize in and export items having capital as a major

cost component.


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When countries specialize in producing goods they have

comparative advantage in, and then trade those goods,they can consume more goods and services than they

could produce on their own.

In a nutshell, this is why international trade can be goodfor all countries involved.

However, even though trade benefits the nation as a

whole, there are winners and losers among producers

and consumers.


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II. Trade Pattern

- what a country imports and exports and who its trading

partners are

India

exports: engineering goods, gems/jewelry, textiles,agricultural goods, chemicals (US, China, UAE, UK)

imports: petroleum, capital goods, gold & silver,

electronics, gems (US, Belgium, China, Singapore)


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Chile

exports: copper, fruit, paper products (US, Japan,

China, South Korea, Netherlands)

imports: intermediate goods, capital goods,consumer goods (Argentina, US, Brazil, China,

Germany)


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III. Trade Balance

The trade balance is the difference between the value of a

countrys exports and the value of its imports.

If exports > imports, then there is a trade surplus.

If exports < imports, then there is a trade deficit.


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Most economists dont believe that trade

deficits/surpluses are inherently good or bad.

The economic impact of a surplus or deficit depends on

the specific circumstances surrounding it.


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Trade Deficit is a Bad Thing for the Economy (Trade

Surplus is Good)

- signifies economic weakness because it reflects an

excessive reliance on foreign products

- represents an expenditure offuture growth because

whenever a nation purchases more than it produces,

funds that could have been used for investment

(future growth) are being used for consumption in

the present

- large trade deficits create conditions favorable for

an economic crisis


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Trade Deficit Shows the Economy is Doing Well

- consumers can enjoy a higher standard of living than if

they were limited to domestically produced goods

- could be a sign of economic strength because imports

are known to increase during times of economic growth

In industrial countries, trade deficits have not sparkedeconomic crisis.


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Trade Surplus may not be Good

A trade surplus could mean a country is too reliant on

foreign demand for its goods.

The surplus could be the result of an undervalued

currency.


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IV. Trade Barriers

Governments often manipulate trade to achieve various

economic, political, and diplomatic objectives.

Types of Trade Barriers

1) tariff: tax on imports

2) export subsidies : involves a transfer of funds from the

government to an export producer

- encourages exports- helps domestic industry (props up domestic price)


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3) Other ways ofrestricting imports

a. quota: a limit on the quantity of a good that can be

imported

b. tariff rate quota: a tariff with two levels

- lower tariff for imports within the quota

- higher tariff for imports that exceed the quota


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c. trigger price mechanism: the government sets a

price floor (legal minimum price) that triggers

government intervention to reduce imports if the

world price falls too low- low world price hurts domestic firms because

more is imported --- a price too low may wipe

out the domestic industry


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d. technical barriers: barriers imposed on imports for

health or safety reasons

e. anti-dumping duties: tariff-like charges imposed on

imports that are sold at less than fair value by the

exporter

f. countervailing duties: tariff-like charges imposed on

imports that are unfairly subsidized by the exporter

government


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g. Voluntary Export Restraints (VER): an export quota

voluntarily imposed by the exporter country at the

request of the importing country

h. other: anything else that the government can think of

ex: require disassembling of an item before it

can be imported


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V. Free Trade: goods and services can flow freely

between nations without government imposed barrierslike tariffs, quotas, VERs, etc.


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The World Trade Organization

The WTO is the global organization dealing with therules of trade between nations.

These rules of trade are the result ofnegotiations

between member countries.

- 150 member countries

- HQ in Geneva, Switzerland

- a successor to the General Agreement on Tariffs and

Trade (GATT)

- formed on January 1, 1995


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The main goal of the WTO is to help international tradeto flow smoothly, freely, fairly, and predictably.

This is accomplished by:

- administering trade agreements

- acting as a forum for trade negotiations

- settling trade disputes

- reviewing national trade policies


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VI. Fair Trade

Fair Trade: a social movement to ensure that producers

of exports in developing nations

- receive a fair price for their product- have safe, healthy working conditions

- use environmentally sustainable practices


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Background:

Competition in global commodity markets has

decreased prices over time.

- between 1970 and 2000, the main agricultural

exports for developing nations (sugar, cotton,cocoa, coffee) fell in price by 30-60%

Prices for commodities are volatile in general.

- bumper crops, crop disasters, demand changes

The international rural poor are the people who suffer

when commodity prices are low/volatile.


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A. Proponents of Fair Trade

- support the theory and principles offree trade

- claim that in many cases, there are market failures

which prevent the benefits of free trade from working

- rural farmers dont have good information

- rural farmers are at the mercy of the middlemen- rural farmers dont have access to credit

- argue that there should be a government mandated

minimum price (price floor) for agricultural goods


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B. Critics of Fair Trade

- usually recognize the idea of Fair Trade is based on the

best ofintentions

- argue that price floors cause market distortions

-a price floor holds the price artificially high

- this encourages more production

- more production can lead to excess supply

- excess supply leads to downward pressure on

price in the non Fair Trade market

- argue that Fair Trade is not a long-term solution


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What did you learn today?

Please explain 2 concepts from todays class.

Documents

Intro to Economics - Trade