Slide 1After studying this chapter, you will be able to:Slide 3How Global Markets WorkHow Global Markets WorkHow Global Markets WorkHow Global Markets WorkSlide 8Slide 9How Global Markets WorkSlide 12Slide 13How Global Markets WorkSlide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32International Trade RestrictionsSlide 34Slide 35Slide 36Slide 37Slide 38Slide 39International Trade RestrictionsSlide 41International Trade RestrictionsSlide 43Slide 44Slide 45Slide 46Slide 47Slide 48International Trade RestrictionsSlide 50Slide 51Slide 52Slide 53Slide 54Slide 55Slide 56Slide 57Slide 58Slide 59Slide 607GLOBAL MARKETS IN ACTION© 2014 Pearson Addison-Wesley¨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 tradeAfter studying this chapter, you will be able to:© 2014 Pearson Addison-WesleyiPhones, 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-WesleyHow Global Markets WorkBecause 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-WesleyHow Global Markets WorkInternational Trade TodayGlobal 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-WesleyHow Global Markets WorkWhat 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-WesleyHow Global Markets WorkThe 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-WesleyWhy the United States Imports T-ShirtsFigure 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.How Global Markets Work© 2014 Pearson Addison-WesleyFigure 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.How Global Markets Work© 2014 Pearson Addison-WesleyWith 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.How Global Markets Work© 2014 Pearson Addison-WesleyWhy the United States Exports AirplanesFigure 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.How Global Markets Work© 2014 Pearson Addison-WesleyFigure 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.How Global Markets Work© 2014 Pearson Addison-WesleyWith 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.How Global Markets Work© 2014 Pearson Addison-WesleyInternational 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?Winners, Losers, and the NetGain from Trade© 2014 Pearson Addison-WesleyGains and Losses fromImportsFigure 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.Winners, Losers, and the NetGain from Trade© 2014 Pearson Addison-WesleyConsumer 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.