Understanding Trade and Globalization: Benefits, Specialization, and Restriction

1. Bell Ringer • Why do countries trade?

2. Why is the World Globalizing? • Through trade and specialization we are becoming better off. • Specialization – to do only one thing • Balance of Trade = value of exports – value of imports • Trade deficit if value of imports is greater than exports • Trade surplus if value of exports is greater than imports

3. Betsy and Bert Which plan would get them done with their chores sooner? Why do countries trade?

4. Absolute and Comparative Advantage • Absolute Advantage – the ability to produce more units of a good or service than some other producer using the same quantity of resources. • Comparative Advantage – the ability to produce a good or service at a lower opportunity costthan another producer.

6. Homework • Comparative and Absolute Advantage • Due Friday

7. Bell Ringer • What is absolute advantage?

8. Absolute and Comparative Advantage

9. Gains from Trade Who has absolute advantage in making computers? Autos? Who has comparative advantage in making computers? Autos? Suppose that Japan and the US specialize and agree to the following trade terms: 3 computers for 1 auto. Before specialization, Japan produced 40 computers and 5 autos. After specialization and trade with the US, Japan wants to maintain the 5 autos for each production period. How many computers will it have? What are its gains from trade?

10. Homework • Due Monday: • Economic Efficiency and Grains from Trade

11. Bell Ringer • What is comparative advantage? • the ability to produce a good or service at a lower opportunity costthan another producer.

12. Bell Ringer • How do countries benefit from trade?

13. Comparative and Absolute Advantage Review • Who has the absolute advantage in producing wheat? Cloth? • Who has the comparative advantage in producing wheat? Cloth?

14. Comparative and Absolute Advantage Review • Suppose Canada and the US agree to specialize according to comparative advantage and to the following terms of trade: 3 tons of wheat for 2 bolts of cloth. There are 60 hours in a production period. • Before specialization, Canada produced 9 tons of wheatand 8.25 bolts of cloth. After specialization and trade with the US, Canada wants to maintain the 9 tons of wheat for each production period. How many bolts of cloth will it have? What are its gains from trade?

15. Restricting Trade • Tariff – a tax on imported goods. Creates revenue for domestic government. • Quota – a limit on the quantity of imports allowed. Restricts the amount supplied by foreign producers. • Subsidy – a government payment to domestic producers or consumers of a product. Producers who receive government subsidies may sell part of their output to foreign consumers.

16. Effects of Trade Restrictions Open Economy with a Subsidy Open Economy with a Quota Open Economy with a Tariff Closed Economy

17. Homework • Some International Effects of Agricultural Subsidies • Reading and Questions due MONDAY

18. Bell Ringer • What is a quota? • It is a limit on the quantity of imports allowed. • Restricts the amount supplied by foreign producers.

19. Effects of Trade Restrictions Open Economy with a Subsidy Open Economy with a Quota Open Economy with a Tariff Closed Economy

20. Effects of Trade Restrictions • WINNERS • Domestic Producers and Foreign Consumers • LOSERS • Foreign Producers and (usually) Domestic Consumers

21. Effects of Trade Restrictions • Similarities between Tariffs, Quotas, and Subsidies • All three reduce international trade and move from production from more efficient producers to less efficient producers • All three benefit domestic producers and foreign consumers • Differences between Tariffs, Quotas, and Subsidies • Tariffs and Quotas rise domestic prices, subsidies lower domestic prices • Tariffs increase gov’t revenue, quotas have no direct effect, and subsidies increase gov’t spending • Tariffs and quotas reduce imports; subsidies increase exports

22. Why do Countries Restrict Trade? • The benefits of trade restrictions are concentrated on the relatively few producers, and the costs of trade restrictions are spread over the relatively many consumers. • Encourages producers to lobby for trade restrictions and discourages consumers to do the same. • Example - $40 million more paid by consumers because of restricted trade. The 100 producers each benefit by $400,000. The 20 million consumers only pay $2 more each.

23. Why do Countries Restrict Trade • Five Arguments for Trade Restrictions (p. 409 – 412) • The National-Defense Argument • The Infant-Industry Argument • The Antidumping Argument • The Low-Foreign Wages Argument • The Tit-for-Tat Argument • Dumping – sale of goods abroad at prices • below their costs and below the price charged • in domestic markets

24. International Economic Integration • Common Market • Member nations trade without restrictions and all share the same trade barriers with the outside world • European Union (EU) • Free Trade Area • Member nations eliminate trade barriers but each can set their own rules on trade with the outside world • North American Free Trade Agreement (NAFTA)

25. Bell Ringer • Typically who are trade restrictions intended to benefit?

26. International Organizations • World Trade Organization • Provides a forum for its member countries to discuss and negotiate trade issues • World Bank • Biggest development bank in the world; lends money to poor, under-developed countries • International Monetary Fund • Provides economic advice and temporary funds to nations with economic difficulties

27. World Trade Organization • Principles • Trade without Discrimination • Freer Trade • Fair Competition • Predictability • Development and Economic Reform http://www.wto.org/

28. Economic Development Developed country A country with a relatively high per capita GDP Less-developed country A country with a relatively low per capita GDP

29. Obstacles to Economic Development Rapid Population Growth Population Growth Rate = Birthrate – Death rate World in the Balance: Population Paradox Why is rapid population growth a real economic concern for the entire world? Per capita real economic growth – an increase from one period to the next in per capita real GDP Per capita real GDP = (real GDP)/population

30. Demographic Transition Model

31. Obstacles to Economic Development Low Savings Rate Vicious cycle of poverty Cultural Differences Political Instability and Government Seizure of Private Property High Tax Rates

32. Bell Ringer • Why is rapid population growth a hindrance to economic development?

33. Obstacles to Economic Development Rapid Population Growth Low Savings Rate Vicious cycle of poverty Cultural Differences Political Instability and Government Seizure of Private Property High Tax Rates

34. Factors that Aid Economic Growth 5 Main Factors that Aid Economic Growth Private Property Rights Physical Capital Human Capital Investment Infrastructure

35. Factors that Aid Economic Growth Economic Growth is linked to MORE PRODUCTIVITY PER WORKER Productivity = Total output produced / total hours it takes to produce total output In 5 groups, read the brief information about a factor of Economic Growth. Discuss the related question. 3 Minutes per Factor, be ready to discuss

36. Factors that Aid Economic Growth 5 Main Factors that Aid Economic Growth Private Property Rights Physical Capital Human Capital Investment Infrastructure

37. Policies that Aid Economic Growth Free Trade Low Taxation Absence of Restrictions on Foreign Investment Absence of Controls on Bank Lending Activity Absence of Wage and Price Controls Simple, Easy Business Licensing Procedures Protecting Private Property

38. Unit 5 Quest • 25 points • Vocabulary Matching • Multiple Choice • Problem set on Comparative and Absolute advantage