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9 Application: International Trade

PRINCIPLES OF

ECONOMICS
FOURTH EDITION

N. G R E G O R Y M A N K I W

PowerPoint® Slides
by Ron Cronovich

© 2007 Thomson South-Western, all rights reserved

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In this chapter, look for the answers to these

questions:
● What determines how much of a good a country
will import or export?
● Who benefits from trade? Who does trade harm?
Do the gains outweigh the losses?
● If policymakers restrict imports, who benefits?
Who is harmed? Do the gains of the policy
outweigh the losses?
● What are some common arguments for restricting
trade? Do they have merit?
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 0
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Introduction
● Recall from Chapter 3:
A country has a comparative advantage in a
good if it produces the good at lower opportunity
cost than other countries.
Countries can gain from trade if each exports the
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goods in which it has a comparative advantage.
● Now we apply the tools of welfare economics
to see where these gains come from and
who gets them.

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The World Price and
Comparative Advantage
● PW = the world price of a good,
the price that prevails in world markets
● PD = domestic price without trade
● If PD < PW,
• country has comparative advantage in the good
• under free trade, country exports the good
● If PD > PW,
• country does not have comparative advantage
• CHAPTER
under free trade,
9 APPLICATION: country imports
INTERNATIONAL TRADE the good 0
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The Small Economy Assumption
● A small economy is a price taker in world markets:
Its actions have no affect on PW.
● Not always true – especially for the U.S. – but
simplifies the analysis without changing its lessons.
● Loading…
When a small economy engages in free trade,
PW is the only relevant price:
• No seller would accept less than PW, because
she could sell the good for PW in world markets.
• No buyer would pay more than PW, because
he could buy the good for PW in world markets.
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A Country That Exports Soybeans
Without trade,
PD = $4 P Soybeans
Q = 500
exports S
PW = $6
$6
Under free trade,
• domestic $4
consumers
demand 300
D
• domestic producers Q
supply 750 300 500 750

• exports = 450
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 0
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A Country That Exports Soybeans
Without trade,
P Soybeans
CS = A + B
PS = C
exports S
Total surplus A
=A+B+C $6
B D
With trade, $4 gains from
CS = A C trade
PS = B + C + D
D
Total surplus
Q
=A+B+C+D

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A C T I V E L E A R N I N G 1: 0

Analysis of trade
Without trade, P Plasma TVs
PD = $3000, Q = 400
In world markets, S
PW = $1500
Under free trade,
$3000
how many TVs
will the country
$1500
import or export? D
Identify CS, PS, and Q
total surplus without 200 400 600
trade, and with trade.
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A C T I V E L E A R N I N G 1: 0

Answers
Under free trade, P Plasma TVs
• domestic
S
consumers
demand 600
• domestic
$3000
producers
supply 200
$1500
• imports = 400 imports D
Q
200 600

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A C T I V E L E A R N I N G 1: 0

Answers
Without trade, P Plasma TVs
CS = A
PS = B + C S
Total surplus gains from
=A+B+C A
trade
$3000
With trade, B D
CS = A + B + D $1500
PS = C C imports D
Total surplus Q
=A+B+C+D

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Summary: The Welfare Effects of Trade

PD < PW PD > PW

direction of trade exports imports

consumer surplus falls rises

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producer surplusrises falls

total surplus rises rises

Whether a good is imported or exported,

trade creates winners and losers.
But the gains exceed the losses.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 0
Thương mại không là vấn đề của
quốc gia mà là vấn đề của từng
nhóm lợi ích trong quốc gia
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Other Benefits of International Trade
● Consumers enjoy increased variety of goods.
● Producers sell to a larger market and may
achieve lower costs through economies of scale.
● Competition from abroad may reduce market
power of some firms, which would increase
total welfare.
● Trade enhances the flow of ideas, facilitates the
spread of technology around the world.

CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 0

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Then Why All the Opposition to Trade?
● Recall one of the Ten Principles:
Trade can make everyone better off.
● The winners from trade could compensate the
losers and still be better off.
● Yet, such compensation rarely occurs.
● The losses are often highly concentrated among
a small group of people, who feel them acutely.
The gains are often spread thinly over many
people, who may not see how trade benefits them.
● Hence, the losers have more incentive to organize
and lobby for restrictions on trade.
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Tariff: An Example of a Trade Restriction
● Tariff: a tax on imports

● Example: Cotton shirts

PW = $20
Tariff: T = $10/shirt
Consumers must pay $30 for an imported shirt.
So, domestic producers can charge $30 per shirt.

● In general, the price facing domestic buyers &

sellers equals (PW + T ).

CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 0

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Analysis of a Tariff on Cotton Shirts
PW = $20 P
Cotton shirts
free trade:
buyers demand 80
sellers supply 25 S
imports = 55
T = $10/shirt
price rises to $30
$30
buyers demand 70
sellers supply 40 $20
imports = 30 imports
imports D
Q
25 40 70 80

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Analysis of a Tariff on Cotton Shirts
free trade P
Cotton shirts
deadweight
CS = A + B + C
+D+E+F loss = D + F
PS = G
S
Total surplus = A + B
+C+D+E+F+G
A
tariff
CS = A + B B
$30
PS = C + G C D E F
Revenue = E $20
G
Total surplus = A + B D
+C+E+G Q
25 40 70 80

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Analysis of a Tariff on Cotton Shirts
D = deadweight loss P
Cotton shirts
deadweight
from the
overproduction loss = D + F
of shirts S
F = deadweight loss
from the under- A
consumption
of shirts B
$30
C D E F
$20
G
D
Q
25 40 70 80

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 Import Quotas: 0

Another Way to Restrict Trade

● An import quota is a quantitative limit on imports
of a good.
● Mostly, has the same effects as a tariff:
• raises price, reduces quantity of imports
• reduces buyers’ welfare
• increases sellers’ welfare
● A tariff creates revenue for the govt. A quota
creates profits for the foreign producers of the
imported goods, who can sell them at higher price.

● CHAPTER 9 APPLICATION: INTERNATIONAL TRADE

Or, govt could auction licenses to import to 0
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In the News: Textile Imports from China
On 12/31/2004,
U.S. quotas on
apparel & textile
products expired.
During Jan 2005:
• TheU.S.
U.S. textile of
imports industry
these
& labor unions
products fought
from Chinafor
new trade restrictions.
increased over 70%. November 2005:
Bush administration agreed
• TheLoss
National Retail
of 12,000 jobs to limit growth in imports
Federation opposed any
in U.S. textile industry. from China.
restrictions.

CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 0

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Arguments for Restricting Trade
1. The jobs argument
Trade destroys jobs in industries that compete
with imports.
Economists’ response:
Look at the data to see whether rising imports
cause rising unemployment…

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U.S. imports & unemployment,
decade averages, 1956-2005
16
% imports
14
%
(% of GDP)
12
%
10
%
8
% unemployment
6
% (% of labor
4
force)
%
2
%
0
% 1956 1966 1976 1986 1996
-65 -75 -85 -95 -200
5
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Arguments for Restricting Trade
1. The jobs argument
Trade destroys jobs in the industries that compete
against imports.
Economists’ response:
Total unemployment does not rise as imports rise,
because job losses from imports are offset by
job gains in export industries.
Even if all goods could be produced more cheaply
abroad, the country need only have a
comparative advantage to have a viable export
industry and to gain from trade.

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Arguments for Restricting Trade
2. The national security argument
An industry vital to national security should be
protected from foreign competition, to prevent
dependence on imports that could be disrupted
during wartime. => 0 phụ thuộc xuất khẩu từ nước khác mà ph tự

Economists’ response: Dầu (Russia) -> Europe

Fine, as long as we base policy on true security

needs.
But producers may exaggerate their own
importance to national security to obtain
protection from foreign competition.

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Arguments for Restricting Trade
3. The infant-industry argument
A new industry argues for temporary protection
until it is mature and can compete with foreign
firms.
Economists’ response:
Difficult for govt to determine which industries
will eventually be able to compete, and whether
benefits of establishing these industries exceed
cost to consumers of restricting imports.
Besides, if a firm will be profitable in the long run,
it should be willing to incur temporary losses.

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Arguments for Restricting Trade
4. The unfair-competition argument
Producers argue their competitors in another
country have an unfair advantage,
e.g. due to govt subsidies.
Economists’ response:
Great! Then we can import extra-cheap products
subsidized by the other country’s taxpayers.
The gains to our consumers will exceed the
losses to our producers.

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Arguments for Restricting Trade
5. The protection-as-bargaining-chip argument
Example: The U.S. can threaten to limit imports
of French wine unless France lifts their quotas
on American beef.
Economists’ response:
Suppose France refuses. Then the U.S. must
choose between two bad options:
A) Restrict imports from France, which reduces
welfare in the U.S.
B) Don’t restrict imports, and suffer a loss of
credibility.

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Arguments for Restricting Trade Trade Agreements
jobs A country can liberalize trade with
national security - unilateral reductions in trade restrictions:
infant industry a country lowers or eliminates its trade
unfair - competition barriers (tariffs, quotas, and import
protection - as - bargaining - chip licenses) without requiring other countries
to do the same.
- multilateral agreements with other nations
VN là 1 trong 6 nước mở nhất TG
Độ mở của nền kinh tế: Xuất khẩu +
Nhập khẩu / GDP
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CHAPTER SUMMARY
● A country will export a good if the world price of
the good is higher than the domestic price without
trade. Trade raises producer surplus, reduces
consumer surplus, and raises total surplus.
● A country will import a good if the world price
is lower than the domestic price without trade.
Trade lowers producer surplus, but raises
consumer and total surplus.
● A tariff benefits producers and generates revenue
for the govt, but the losses to consumers exceed
these gains.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE 0
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CHAPTER SUMMARY
● Common arguments for restricting trade include:
protecting jobs, defending national security,
helping infant industries, preventing unfair
competition, and responding to foreign trade
restrictions.
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Some of these arguments have merit in some
cases, but economists believe free trade is usually
the better policy.

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