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UCSB ECON 1 - More on international trade

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International tradeToday: More on international tradeAddressing concerns about tradeTrade has costs and benefitsWhy is media coverage skewed?Suppose there is protectionism elsewhereAnother issue: Lead in toysMonitoring is costlyAnother example: American carsTrade issuesReview of comparative advantageComparative advantage: Same numbers, different namesComparative advantageRecall increasing opportunity costProduction possibilities curveSlide 16The world marketConsumption possibilities curveWhich consumption possibility curve is best?Optimal production in an open economySlide 21Supply and demand analysis of tradeMarket for cars, w/o tradeSlide 24Market for cars, with tradeSlide 26Surplus with tradeWithout imports (left) With imports (right)Net gainA similar exercise can be done for a country that is a net exporterTariffs and quotasWhat happens when we impose a tariff?Slide 33Slide 34Slide 35Total surplus and tariff money collectedSlide 37Total surplus and tariff money collectedQuotasWhat else is different with quotas?“Outsourcing”Slide 42How to make sure your job does not get outsourcedFinal thoughts about “outsourcing”SummaryInternational tradeToday: Winners and losers of various international trade policiesToday: More on international tradeAddressing concerns about tradeReview of comparative advantageExamining consumption possibilitiesWithout tradeWith tradeSupply and demand analysis of tradeTariffs and Quotas“Outsourcing”Addressing concerns about trade“A majority of Americans, including 60 percent of Republicans, now believe free trade is bad for the U.S. economy, according to recent NBC News-Wall Street Journal polls.”(Source: “Trade jitters, anti-China sentiment rouse US voters,” Reuters, Nov. 14, 2007)Why do so many Americans have this opinion about trade?Trade has costs and benefitsWhen another country can produce goods lower than in the United States, two things happenJobs are lost in the United StatesConsumers pay lower prices for the good that is now importedThe news media usually focuses on the jobs issue more than about pricesWhy is media coverage skewed?Any job lost seriously deteriorates the quality of life of an individualMost people don’t care to read headlines advertising “The price of rice goes down by two cents per pound”However, small gains on many products lead to substantial increases in the purchasing power of the dollarSuppose there is protectionism elsewhereThe United States is a leading exporter of fresh fruit (see on-line reading list for source)Suppose that other countries outlawed the import of fresh fruitUS jobs lostDecrease in price of fruit in the USIncrease in the price of fruit in other countriesAnother issue: Lead in toysRecently, many toys manufactured in China have been recalled due to unsafe levels of leadThis has raised concerns about the viability of toy exportsChina will stop exporting toys if the world does not view the toys as safe enough, given the priceMonitoring is costlyMonitoring toys for lead is costly, adding to the cost of toys purchasedHowever, testing costs may be small relative to the additional revenues that can be generated if “safe toys” can be guaranteedAnother example: American carsOver the last 30 years, American cars have often been looked at as “inferior” compared to some foreign modelsWith competition from trade, domestic car producers must keep costs down and quality up in order to successfully sell cars in the domestic marketThe same thing goes for foreign toysIf quality control standards are not maintained abroad, people will buy their toys domesticallyTrade issuesThere are many other issues that are related to tradeIf you would like an in-depth analysis of trade, you can enroll in a class that deals with tradeToday, we will talk about the basic issues of trade, and who the winners and losers areReview of comparative advantageRecall the principle of comparative advantage“Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest.” (F/B p. 39)Today, we will apply this concept on a countrywide scaleComparative advantage: Same numbers, different names Productivity in pizza productionProductivity in salad productionUnited States20 pizzas cooked per hour10 salads made per hourChile 16 pizzas cooked per hour4 salads made per hourComparative advantageTo find comparative advantage for each person, find the lowest number in each columnOpportunity cost of cooking a pizzaOpportunity cost of making a saladU.S. ½ salad 2 pizzasChile ¼ salad 4 pizzasRecall increasing opportunity costOpportunity cost increases as production increases within each countryEach country uses its best pizza maker to make its first pizzasThen, the next best pizza maker is used, etc.The same applies to saladsProduction possibilities curveRecall from last lecture that all of the points along PGQ are the efficient points of the production possibilities curveRecall that this shape occurs due to increasing opportunity costs as more is producedProduction possibilities curveWithout trade, only points along arc PGQ (or points between this arc and the origin) can be consumedWe will see that gains can be made by tradeThe world marketIn the world market, there is an equilibrium price (based on world supply and world demand)Any one country that enters or exits the market usually does not change the market price muchFor ease of discussion, assume that entry or exit by any one country does not change the world priceConsumption possibilities curveIf we produce at point G, we can trade goods at the given market priceProduction at G (with trade)  Consumption anywhere along FGHWhich consumption possibility curve is best?We could produce at one of the red dots before we start tradingHowever, note that there are fewer consumption sets possible than producing at GOptimal production in an open economySince the red line is suboptimal, we will not utilize itSimilarly, any point except G will produce a similar result to the red lineSuboptimal consumption possibilities for any production except GOptimal production in an open economySolutionProduce such that the “line of trade possibilities” is tangent to the production possibilities curveIn this case, point G is tangent to line


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