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Global Markets in Action

9. Global Markets in Action. CHAPTER. C H A P T E R C H E C K L I S T. When you have completed your study of this chapter, you will be able to. 1 Explain how markets work with international trade . 2 Identify the gains from international trade and its winners and losers .

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Global Markets in Action

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  1. 9 Global Markets in Action CHAPTER

  2. C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to • 1Explain how markets work with international trade. • 2Identify the gains from international trade and its winners and losers. 3Explain the effects of international trade barriers. 4Explain and evaluate arguments used to justify restricting international trade.

  3. 9.1 HOW GLOBAL MARKETS WORK • Imports are the good and services that we buy from people in other countries. • Exports are the goods and services we sell to people in other countries.

  4. 9.1 HOW GLOBAL MARKETS WORK • International Trade Today • The United States is the world’s biggest international trader and accounts for 10 percent of world exports and 15 percent of world imports. • In 2006, total U.S. exports were $1,466 billion, which is about 11 percent of the value of U.S. production. • In 2006, total U.S. imports were $2,229 billion, which is about 17 percent of the value of U.S. expenditure.

  5. 9.1 HOW GLOBAL MARKETS WORK • The United States trades internationally in goods and services. • In 2006, U.S. exports of services were $431 billion (29 percent of total exports) and U.S. imports of services were $349 billion (16 percent of total imports). • The largest U.S. exports of goods are airplanes.. • The largest U.S. imports of goods are crude oil and automobiles. • The largest U.S. exports of services are banking, insurance, business consulting and other private services.

  6. 9.1 HOW GLOBAL MARKETS WORK • What Drives International Trade? • The fundamental force that generates trade between nations is comparative advantage. • The basis for comparative trade is divergent opportunity costs between countries. • National comparative advantage as the ability of a nation to perform an activity or produce a good or service at a lower opportunity cost than any other nation.

  7. 9.1 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 at which they have a comparative advantage and then trading. • Both countries are better off.

  8. 9.1 HOW GLOBAL MARKETS WORK • Why the United States Imports T-Shirts • Figure 9.1(a) shows that with no international trade, • 1. U.S. demand and U.S. supply determine • 2. The U.S. price at $8 a T-shirt and • 3. U.S. firms produce at 40 million T-shirts a year and U.S. consumers buy 40 million T-shirts a year.

  9. 9.1 HOW GLOBAL MARKETS WORK • The demand for and supply of T-shirts in the world determine • 4. The world price at $5. • The world price is less than $8, so the rest of the world has a comparative advantage in producing T-shirts. • Figure 9.1(b) shows that with international trade, • 5. The price in the United States falls to $5 a T-shirt.

  10. 9.1 HOW GLOBAL MARKETS WORK • With international trade, • 6. Americans increase the quantity they buy to 60 million T-shirts a year. • 7. U.S. garment makers decrease the quantity they produce to 20 million T-shirts a year. • 8. The United States imports 40 million T-shirts a year.

  11. 9.1 HOW GLOBAL MARKETS WORK • Why the United States Exports Airplanes • Figure 9.2(a) shows that with no international trade, • 1. Equilibrium in the U.S. airplane market. • 2. The U.S. price is $100 million a airplane and • 3. U.S. aircraft makers produce at 400 airplanes a year and U.S. airlines buy 400 a year.

  12. 9.1 HOW GLOBAL MARKETS WORK • The world market for airplanes determines • 4. The world price at $150 million an airplane. • The world price is higher than $100 million, so the United States has a comparative advantage in producing airplanes.

  13. 9.1 HOW GLOBAL MARKETS WORK • Figure 9.2(b) shows that with international trade, • 5. The price of an airplane in the United States rises to $150 million.

  14. 9.1 HOW GLOBAL MARKETS WORK • With international trade, • 6. U.S. aircraft makers increase the quantity they produce to 700 airplanes a year. • 7. U.S. airlines decrease the quantity they buy to 200 airplanes a year. • 8. The United States exports 500 airplanes a year.

  15. 9.2 WINNERS, LOSERS, AND NET GAINS ... • 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? • We measure the gains and losses by examining the effects of international trade on consumer surplus, producer surplus, and total surplus.

  16. 9.2 WINNERS, LOSERS, AND NET GAINS ... • Gains and Losses from Imports • 1. With no international trade, the price of a T-shirt in the United States is $8 and 40 million T-shirts a year are bought and sold. • 2. Consumer surplus is the area of the green triangle. • 3. Producer surplus is the area of the blue triangle.

  17. 9.2 WINNERS, LOSERS, AND NET GAINS ... • With international trade, the price of a T-shirt falls to the • 4. The world price of $5. • 5. Consumer surplus expands from area A to the area A + B + D. • 6. Producer surplus shrinks to the area C.

  18. 9.2 WINNERS, LOSERS, AND NET GAINS ... • The area B is transferred from producers to consumers, but • 7. Area D is an increase in total surplus. • Area D is the net U.S. gains from trade.

  19. 9.2 WINNERS, LOSERS, AND NET GAINS ... • Consumers gain because they pay less, buy more T-shirts, and receive a larger consumer surplus. • Producers lose because they receive a lower price, produce fewer T-shirts, and receive a smaller producer surplus. • Consumers’ gain exceeds producers’ loss, so total surplus increases.

  20. 9.2 WINNERS, LOSERS, AND NET GAINS ... • Gains and Losses from Exports • 1. With no international trade, the price of an airplane in the United States is $100 million and 400 million a year are bought and sold. • 2. Consumer surplus is the area of the green triangle. • 3. Producer surplus is the area of the blue triangle.

  21. 9.2 WINNERS, LOSERS, AND NET GAINS ... • With international trade, the price of an airplane rises to the • 4. The world price of $150 million. • 5. Consumer surplus shrinks to the area A. • 6. Producer surplus expands from area C to the area B + C + D.

  22. 9.2 WINNERS, LOSERS, AND NET GAINS ... • The area B is transferred from consumers to producers, but • 7. Area D is an increase in total surplus • Area D is the net U.S. gains from trade.

  23. 9.2 WINNERS, LOSERS, AND NET GAINS ... • Consumers lose because they pay a higher price, buy fewer airplanes, and receive a smaller consumer surplus. • Producers gain because they receive a higher price, produce more airplanes, and receive a larger producer surplus. • Producers’ gain exceeds consumers’ loss, so total surplus increases.

  24. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Governments restrict international trade to protect domestic producers from competition. • The four sets of tools they use are • Tariffs • Quotas • Other import restrictions • Export subsidies

  25. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Tariffs • A tariff is a tax on a good that is imposed by the importing country when an imported good crosses its international boundary. • For example, the government of India imposes a 100 percent tariff on wine imported from California. • So when an Indian wine merchant imports a $10 bottle of Californian wine, he pays the Indian government $10 import duty.

  26. 9.3 INTERNATIONAL TRADE RESTRICTIONS • The Effects of a Tariff • With free international trade, the world price of a T-shirt is $5 and the United States imports 40 million T-shirts a year. • Imagine that the United States imposes a tariff of $2 on each T-shirt imported. • The price of a T-shirt in the United States rises by $2. • Figure 9.5 shows the effect of the tariff on the market for T-shirts in the United States.

  27. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Figure 9.5(a) shows the market before the government imposes the tariff. • 1. The price is the world price of $5 and • 2. The United States imports 40 million T- shirts.

  28. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Figure 9.5(b) shows the market with the tariff. • 3. The tariff of $2 raises the price in the U.S. market to $7. • 4. U.S. imports decrease to 10 million a year. • 5. U.S. government collects the tax revenue of $20 million a year.

  29. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Winners, Losers, and Social Loss from a Tariff • When the U.S. government imposes a tariff on imported T-shirts: • U.S. producers of T-shirts gain. • U.S. consumers of T-shirts lose. • U.S. consumers lose more than U.S. producers gain. U.S. Producers of T-shirts Gain U.S. producers receive a higher price (the world price plus the tariff), so produce more T-shirts. Producer surplus increases.

  30. 9.3 INTERNATIONAL TRADE RESTRICTIONS • U.S. Producers of T-shirts Gain U.S. garment makers can now sell T-shirts for a higher price (the world price plus the tariff), so they produce more T-shirts. But the marginal cost of producing a T-shirt is less than the higher price, so the producer surplus increases. The increased producer surplus is the gain to U.S. garment makers from the tariff.

  31. 9.3 INTERNATIONAL TRADE RESTRICTIONS • U.S. Consumers of T-shirts Lose U.S. buyers of T-shirts now pay a higher price (the world price plus the tariff), so they buy fewer T-shirts. The combination of a higher price and a smaller quantity bought decreases consumer surplus. The loss of consumer surplus is the loss to U.S. consumers from the tariff.

  32. 9.3 INTERNATIONAL TRADE RESTRICTIONS • U.S. Consumers Lose More than U.S. Producers Gain Consumer surplus decreases and producer surplus increases. But which changes by more? Figure 9.6 illustrates the change in total surplus.

  33. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Figure 9.6(a) shows the total surplus with free international trade. • 1. The world price • 2. Imports • 3. Consumer surplus • 4. Producer surplus • 5. The gains from free trade. • Total surplus is maximized.

  34. 9.3 INTERNATIONAL TRADE RESTRICTIONS • 6. The $2 tariff is added to the world price and increases the U.S. price of a T-shirt to $7. • The quantity of T-shirts produced in the United States increases and the quantity bought decreases. • 7. Imports decrease.

  35. 9.3 INTERNATIONAL TRADE RESTRICTIONS • 8. Consumer surplus shrinks to the green area. • 9. Producer surplus expands to the blue area. • Area B is a transfer from consumer surplus to producer surplus.

  36. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Tariff revenue equals the imports of T-shirts multiplied by the tariff. • 10. The tariff revenue isarea C. • 11.The sum of the two areas labeled D is the loss of total surplus—a deadweight loss.

  37. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Quotas • A quotais a quantitative restriction on the import of a good that limits the maximum quantity of a good that may be imported in a given period.

  38. 9.3 INTERNATIONAL TRADE RESTRICTIONS • The Effects of a Quota • With free international trade, the world price of a T-shirt is $5 and the United States imports 40 million T-shirts a year. • Imagine that the United States imposes a quota of 10 million on imported T-shirts. • Figure 9.7 shows the effect of the quota on the market for T-shirts in the United States.

  39. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Figure 9.7(a) shows the market before the government imposes the quota. • 1. The price is the world price of $5 and • 2. The United States imports 40 million T-shirts.

  40. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Figure 9.5(b) shows the market with the quota. • 3. With an import quota of 10 million T-shirts, the supply of T-shirts in the United States becomes S + quota. • 4. The price rises to $7.

  41. 9.3 INTERNATIONAL TRADE RESTRICTIONS • With the higher price, Americans decrease the number of T-shirts they buy to 45 million a year. • U.S. garment makers increase production to 35 million T-shirts a year. • 5. Imports of T-shirts decrease to the quota of 10 million.

  42. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Winners, Losers, and Social Loss from a Quota • When the U.S. government imposes a tariff on imported T-shirts: • U.S. producers of T-shirts gain. • U.S. consumers of T-shirts lose. • Importers of T-shirts gain. • U.S. consumers lose more than U.S. producers gain and importers gain. Figure 9.8 illustrates the winners and losers with a quota.

  43. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Figure 9.8(a) shows the total surplus with free international trade. • 1. The world price • 2. Imports • 3. Consumer surplus • 4. Producer surplus • 5. The gains from free trade. • Total surplus is maximized.

  44. 9.3 INTERNATIONAL TRADE RESTRICTIONS • The import quota raises the U.S. price of a T-shirt to $7. • The quantity of T-shirts produced in the United States increases and the quantity bought decreases. • 6. Imports decrease.

  45. 9.3 INTERNATIONAL TRADE RESTRICTIONS • 7. Consumer surplus shrinks to the green area. • 8. Producer surplus expands to the blue area. • Area B is a transfer from consumer surplus to producer surplus. • 9.Importers’ profit is the sum of the two areas C.

  46. 9.3 INTERNATIONAL TRADE RESTRICTIONS • 10.The sum of the two areas labeled D is the loss of total surplus—a deadweight loss created by the quota.

  47. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Other Import Barriers • Two sets of policies that influence imports are • Health, safety, and regulation barriers • Voluntary export restraints • Thousands of detailed health, safety, and other regulations restrict international trade. • For example, U.S. food imports are examined by the Food and Drug Administration to determine whether the food is “pure, wholesome, safe to eat, and produced under sanitary conditions.”

  48. 9.3 INTERNATIONAL TRADE RESTRICTIONS • A voluntary export restraint is like a quota allocated to a foreign exporter of the good. • A voluntary export restraint decreases imports just like a quota does but the foreign exporter gets the profit from the gap between the domestic price and the world price.

  49. 9.3 INTERNATIONAL TRADE RESTRICTIONS • Export Subsidies • A subsidy is a payment made by the government to a producer. • An export subsidy is a payment made by the government to a domestic producer of an exported good. • Export subsidies bring gains to domestic producers, but they result in overproduction in the domestic economy and underproduction in the rest of the world and so create a deadweight loss.

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