7 GLOBAL MARKETS IN ACTION After studying this chapter you will be able to Explain how markets work with international trade Identify the gains from international trade and its winners and losers Explain the effects of international trade barriers Explain and evaluate arguments used to justify restricting international trade 2014 Pearson Addison Wesley iPhones Wii games and Nike shoes are just three of the items you might buy that are not produced in the United States In fact most of the goods that you buy are produced abroad and transported here in container ships or cargo jets And it s not only goods produced abroad that you buy it is services too All these activities are part of the globalization process that is having a profound effect on our lives Why do we go to such lengths to trade and communicate with others in faraway places 2014 Pearson Addison Wesley How Global Markets Work Because we trade with people in other countries the goods and services that we can buy and consume are not limited by what we can produce Imports are the goods and services that we buy from people in other countries Exports are the goods and services we sell to people in other countries 2014 Pearson Addison Wesley How Global Markets Work International Trade Today Global trade today is enormous In 2011 global exports and imports were 22 trillion which is one third of the value of global production In 2011 total U S exports were 2 1 trillion which is about 14 percent of the value of U S production In 2011 total U S imports were 2 7 trillion which is about 18 percent of the value of total U S expenditure Services were about 33 percent of total U S exports and about 20 percent of total U S imports 2014 Pearson Addison Wesley How Global Markets Work What Drives International Trade The fundamental force that generates trade between nations is comparative advantage The basis for comparative advantage is divergent opportunity costs between countries National comparative advantage is the ability of a nation to perform an activity or produce a good or service at a lower opportunity cost than any other nation 2014 Pearson Addison Wesley How Global Markets Work The opportunity cost of producing a T shirt is lower in China than in the United States so China has a comparative advantage in producing T shirts The opportunity cost of producing an airplane is lower in the United States than in China so the United States has a comparative advantage in producing airplanes Both countries can reap gains from trade by specializing in the production of the good in which they have a comparative advantage and then trading Both countries are better off 2014 Pearson Addison Wesley How Global Markets Work Why the United States Imports T Shirts Figure 7 1 a shows U S demand and U S supply with no international trade The price of a T shirt is 8 U S firms produce 40 million T shirts a year and U S consumers buy 40 million T shirts a year 2014 Pearson Addison Wesley How Global Markets Work Figure 7 1 b shows the market in the United States with international trade World demand and world supply of T shirts determine the world price of a T shirt at 5 The world price is less than 8 so the rest of the world has a comparative advantage in producing T shirts 2014 Pearson Addison Wesley How Global Markets Work With international trade the price of a T shirt in the United States falls to 5 At 5 a T shirt U S garment makers cut production to 20 million T shirts a year At 5 a T shirt U S consumers buy 60 million T shirts a year The United States imports 40 million T shirts a year 2014 Pearson Addison Wesley How Global Markets Work Why the United States Exports Airplanes Figure 7 2 a shows U S demand and U S supply with no international trade The price of an airplane is 100 million Boeing produces 400 airplanes a year and U S airlines buy 400 a year 2014 Pearson Addison Wesley How Global Markets Work Figure 7 2 b shows the market in the United States with international trade World demand and world supply of airplanes determine the world price of an airplane at 150 million The world price exceeds 100 million so the United States has a comparative advantage in producing airplanes 2014 Pearson Addison Wesley How Global Markets Work With international trade the price of an airplane in the United States rises to 150 million At 150 million U S airlines buy 200 jets a year At 150 million Boeing produces 700 airplanes a year The United States exports 500 airplanes a year 2014 Pearson Addison Wesley Winners Losers and the Net Gain from Trade International trade lowers the price of an imported good and raises the price of an exported good Buyers of imported goods benefit from lower prices and sellers of exported goods benefit from higher prices But some people complain about international competition not everyone gains Who wins and who loses from free international trade 2014 Pearson Addison Wesley Winners Losers and the Net Gain from Trade Gains and Losses from Imports Figure 7 3 a shows the market in the United States with no international trade Total surplus from T shirts is the sum of the consumer surplus and the producer surplus 2014 Pearson Addison Wesley Consumer Surplus An economic measure of consumer satisfaction which is calculated by analyzing the difference between what consumers are willing to pay for a good or service relative to its market price A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price Producer Surplus An economic measure of the difference between the amount that a producer of a good receives and the minimum amount that he or she would be willing to accept for the good The difference or surplus amount is the benefit that the producer receives for selling the good in the market 2014 Pearson Addison Wesley Winners Losers and the Net Gain from Trade Figure 7 3 b shows the market in the United States with international trade The world price is 5 a T shirt Consumer surplus expands from area A to the area A B D Producer surplus shrinks to the area C 2014 Pearson Addison Wesley Winners Losers and the Net Gain from Trade The area B is transferred from producers to consumers Area D is an increase in total surplus Area D is the net gain from imports 2014 Pearson Addison Wesley Winners Losers and the Net Gain from Trade Gains and Losses from Exports Figure 7 4 a shows the market in the United States with no international trade Total surplus from airplanes is the sum of