1 / 51

HKCEE Macroeconomics

HKCEE Macroeconomics. Chapter 7:International Trade. Why do Countries Trade?. self-sufficiency cannot be achieved. cheaper products could be enjoyed. raising standard of living by enjoying a larger variety of products. The Model of Absolute Advantage. Absolute Advantage (AA).

Download Presentation

HKCEE Macroeconomics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. HKCEE Macroeconomics Chapter 7:International Trade CH7-International Trade-SV

  2. Why do Countries Trade? self-sufficiency cannot be achieved • cheaper products could be enjoyed • raising standard of living by enjoying a larger variety of products CH7-International Trade-SV

  3. The Model of Absolute Advantage Absolute Advantage (AA) • allows a country to produce more of a good with the same amount of resources • allows a country to produce the same amount of a good with less resource CH7-International Trade-SV

  4. The Model of Absolute Advantage An Illustration • AA in producing good A: • AA in producing good B: Country X Country Y CH7-International Trade-SV

  5. The Model of Absolute Advantage Task 1:Study the table below and find out which country has the AA in producing goods A and B. CH7-International Trade-SV

  6. The Model of Absolute Advantage Task2:Study the table below and find out which country has the AA in producing goods A and B. CH7-International Trade-SV

  7. The Model of Absolute Advantage The Principle of Absolute Advantage • It states that countries should specialize in producing goods with absolute advantage. • They would then gain if they follow the principle to trade with other countries • Limitation: Trade would not occur if countries enjoy NO absolute advantage in production. CH7-International Trade-SV

  8. The Model of Comparative Advantage Comparative Advantage (CA) • A country is said to have a comparative advantage in producing a good over others if it can produce the good at a lower opportunity cost than other countries. CH7-International Trade-SV

  9. The Model of Comparative Advantage An Illustration CH7-International Trade-SV

  10. The Model of Comparative Advantage An Illustration CH7-International Trade-SV

  11. The Model of Comparative Advantage Task3:Study the table below and find out which country has the CA in producing goods A and B. CH7-International Trade-SV

  12. The Model of Comparative Advantage Task3:Study the table below and find out which country has the CA in producing goods A and B. Opportunity cost of producing 1 unit of … 1B/6 = 0.17B 2B/4 = 0.5B 6A/1 = 6A 4A/2 = 2A CH7-International Trade-SV

  13. The Model of Comparative Advantage Task4:Study the table below and find out which country has the CA in producing goods A and B. CH7-International Trade-SV

  14. The Model of Comparative Advantage Task4:Study the table below and find out which country has the CA in producing goods A and B. Opportunity cost of producing 1 unit of … 2/10B = 0.2B 3/9B = 0.3B 10/2A = 5A 9/3A = 3A CH7-International Trade-SV

  15. The Model of Comparative Advantage The Law/Principle of Comparative Advantage • It states that countries should specialize in producing goods with comparative advantage. • Total output will be increased by engaging specialization in production. • They then would gain if they follow the principle to trade with other countries CH7-International Trade-SV

  16. The Model of Comparative Advantage An Illustration There are two countries only Each country has 2 man-hours Each country produces 2 goods only No country could live on one good only Without international trade, each country is under self-sufficient CH7-International Trade-SV

  17. The Model of Comparative Advantage Given: CH7-International Trade-SV

  18. The Model of Comparative Advantage Under Self-sufficient Assume each country devotes equal amount of resources (i.e. 1 man-hour) to produce both goods. Total Output 11 AND 15 CH7-International Trade-SV

  19. The Model of Comparative Advantage After Specialization Country X spends 0.5 man-hour in producing good A and 1.5 man-hours on good B. Country Y spends all 2 man-hours in producing good A. CH7-International Trade-SV

  20. The Model of Comparative Advantage After Specialization 13 18 11 15 +2 +3 CH7-International Trade-SV

  21. Terms of Trade and Gains from Trade Terms of Trade (TOT) • TOT refers to the amount of goods that a nation must export for one unit of a good that she imports. • TOT = ?X:1M • TOT should be mutually beneficial to trading partners. • TOT should be setin-betweenthe opportunity costs of trading partners. CH7-International Trade-SV

  22. Find both countries’ O.C. in their productions from the table below. Terms of Trade and Gains from Trade CH7-International Trade-SV

  23. Terms of Trade and Gains from Trade Finding the beneficial TOT: Opportunity Cost of producing 1 unit of … Good A Good B Country X (12B/6=)2B or (6A/12=)0.5A Country Y (3B/5=)0.6B or (5A/3=)1.67A • Mutually beneficial TOT: Good A: 0.6B-2B Good B: 0.5A-1.7A CH7-International Trade-SV

  24. Terms of Trade and Gains from Trade Gains from Trade to Importing Country • Unit Gains from Trade = Domestic O. C. (saved) - TOT • Total Gains from Trade = Unit Gains x Amount Imported CH7-International Trade-SV

  25. Terms of Trade and Gains from Trade Gains from Trade to Exporting Country • Units Gains from Trade = TOT - Domestic O. C. • Total Gains from Trade = Unit Gains x Amount Exported CH7-International Trade-SV

  26. Terms of Trade and Gains from Trade Task 5a: Find the opportunity cost of both countries in producing goods A and B. Given: • Output/1 man-hour: Country X: 6A or 12B • Output/1 man-hour: Country Y: 5A or 3B • Each country has 2 man-hours only • Complete specialization • Country X exports 5B CH7-International Trade-SV

  27. Terms of Trade and Gains from Trade The opportunity cost of both countries in producing goods A & B are below: Opportunity Cost of producing 1 unit of … Good A Good B Country X (12B/6=)2B or (6A/12=)0.5A Country Y (3B/5=)0.6B or (5A/3=)1.67A CH7-International Trade-SV

  28. Terms of Trade and Gains from Trade • Task 5b: Find the gains from trade for both countries if the TOT is (a) 1A:1B (b) 1A:2B (c) 2A:1.2B CH7-International Trade-SV

  29. Terms of Trade and Gains from Trade (a) When TOT = 1A:1B • Unit Gains from Trade to Importing country, Y = Domestic O. C. (saved) - TOT = 1.67A - 1A = 0.67A (saved) • Unit Gains from Trade to Exporting country, X = TOT - Domestic O. C. = 1A - 0.5A = 0.5A CH7-International Trade-SV

  30. Terms of Trade and Gains from Trade (a) When TOT = 1A:1B • Total Gains from Trade to Importing country, Y = Unit Gains x Amount Imported = 0.67A(5) = 3.35A (saved) • Total Gains from Trade to Exporting country, X = Unit Gain x Amount Exported = 0.5A(5) = 2.5A CH7-International Trade-SV

  31. Terms of Trade and Gains from Trade (b) When TOT = 1A:2B ( 1B = 0.5A) • Unit Gains from Trade to Importing country, Y = Domestic O. C. (saved) - TOT = 1.67A - 0.5A = 1.17A (saved) • Unit Gains from Trade to Exporting country, X = TOT - Domestic O. C. = 0.5A - 0.5A = 0A CH7-International Trade-SV

  32. Terms of Trade and Gains from Trade (b) When TOT = 1A:2B( 1B = 0.5A) • Total Gains from Trade to Importing country, Y = Unit Gains x Amount Imported = 1.17A(5) = 5.85A (saved) • Total Gains from Trade to Exporting country, X = Unit Gain x Amount Exported = 0A(5) = 0A CH7-International Trade-SV

  33. Terms of Trade and Gains from Trade (c) When TOT = 2A:1.2B( 1B =1.67A) • Unit Gains from Trade to Importing country, Y = Domestic O. C. (saved) - TOT = 1.67A - 1.67A = 0A (saved) • Unit Gains from Trade to Exporting country, X = TOT - Domestic O. C. = 1.67A - 0.5A = 1.17A CH7-International Trade-SV

  34. Terms of Trade and Gains from Trade (c) When TOT = 2A:1.2B( 1B =1.67A) • Total Gains from Trade to Importing country, Y = Unit Gains x Amount Imported = 0A(5) = 0A (saved) • Total Gains from Trade to Exporting country, X = Unit Gain x Amount Exported = 1.17A(5) = 5.85A CH7-International Trade-SV

  35. Terms of Trade and Gains from Trade Task 6 Referring to your findings in Task 5: • How is the TOT set to allow the importing country capture ALL the gains from trade? • How is the TOT set to allow the exporting country capture ALL the gains from trade? • Is it still beneficial for a country to trade if its gains from trade is zero? CH7-International Trade-SV

  36. Terms of Trade and Gains from Trade The importing country will capture ALL the gains from trade if the TOT is set equal to the exporting country’s domestic opportunity cost. • The exporting country will capture ALL the gains from trade if the TOT is set equal to the importing country’s domestic opportunity cost. CH7-International Trade-SV

  37. Terms of Trade and Gains from Trade Country with zero gains from trade will still trade for other benefits: • To enjoy goods that it cannot produce. • To enjoy higher standard of living. • To maintain better international relationship. • To improve skills and techniques of production by examining imports CH7-International Trade-SV

  38. Terms of Trade and Gains from Trade Task 7 Given: • each country has its own comparative advantage in production • trading parties reach a mutually beneficial terms of trade Question: Must trade take place? Answer:NO CH7-International Trade-SV

  39. Factors Affecting Trade Potential trade might be halted if: • the transportation cost outweighs the potential gains from trade. • the other costs of conducting trade (e.g. insurance cost) becomes prohibitively high when serious political problems occur, e.g. wars. CH7-International Trade-SV

  40. Free Trade Benefits of Free Trade: • More output could be produced. • Better international relationship • Mass production allows firms to enjoy economies of scale. • Exchange of technology is allowed. • Standard of living is higher with a larger variety of cheaper imports. • More employment opportunities CH7-International Trade-SV

  41. Free Trade • Promotion of Free Trade: • World Trade Organization, WTO: reducing trade barriers • Generalized Schemes of Preference, GSP: low/no tariffs to developing countries • Asia-Pacific Economic Cooperation, APEC: promoting free trade & economic cooperation • North America Free Trade Agreement, NAFTA: promoting tariff-free trade CH7-International Trade-SV

  42. Trade Restrictions(1) • Tariffs • Tariffs are taxes on imports. • Tariffs can be per-unit tax or ad valorem tax (i.e. percentage tax). • Effects of Tariffs on Imports • Cost of production increases • Supply of imports decreases • Import price increases • Quantity imported/transacted falls CH7-International Trade-SV

  43. P S2 S1 D tax P2 P1 Q 0 Q1 Q2 Trade Restrictions(1) • Effects of Tariffs on Imports CH7-International Trade-SV

  44. Trade Restrictions(2) • Import Quota • Import quota fixes the maximum amount or value of imports during a given period. • Effects of Import Quotas on Imports • Supply of imports decreases • Quantity imported/transacted falls • Import price increases • Kinked Supply curve resulted CH7-International Trade-SV

  45. Quota P S2 S1 D P2 P1 Q 0 Q1 Q2 Trade Restrictions(2) • Effects of Quota on Imports CH7-International Trade-SV

  46. Trade Restrictions • Comparison Between Tariffs & Quota CH7-International Trade-SV

  47. Trade Restrictions (3) • Subsidies to Local Goods • A sum of money provided by the government for local production • Effects: • Lower cost allows larger local supply • Local product prices fall leading to more local products demanded • Demand for imports falls and thus fewer products being imported CH7-International Trade-SV

  48. Trade Restrictions (4) • Embargo • A ban on imports • Total embargo versus partial embargo • It is imposed for political reasons CH7-International Trade-SV

  49. Trade Restrictions (5) • Exchange Control • A government control on the buying and selling of foreign currencies • Imports will be reduced by limiting the amount of foreign currencies available CH7-International Trade-SV

  50. Trade Restrictions (6) • Voluntary Export Restriction • The exporting countries themselves restrict their exports to some other countries • Imports to Country A will then be reduced if Country B restricts her exports voluntarily. CH7-International Trade-SV

More Related