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International Trade and Public Policy

Learn how nations benefit from specialization and trade, the role of opportunity cost, production possibilities curve, comparative advantage, trade policies, and recent trade agreements in the global economy. Explore concepts like protectionist policies, dumping, and the impact on economic growth.

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International Trade and Public Policy

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  1. International Trade andPublic Policy

  2. Benefits from Specialization and Trade • If a nation produced everything it consumed, it would depend on any other nation for its livelihood. • Although self-sufficiency sounds appealing, countries are better off if they specialize in some products and trade some of those products with other nations for products that your nation doesn’t produce.

  3. Benefits from Specialization and Trade • Specialization and trade are concepts based on the principle of opportunity cost. PRINCIPLEof Opportunity CostThe opportunity cost of something is what you sacrifice to get it.

  4. Output and Opportunity Cost • The following table shows the daily output of two goods for two nations:

  5. Production Possibilities Curve • The production possibilities frontier shows the possible combinations of two goods that can be produced by an economy. It is the Opportunity Cost of one good in terms of the other.

  6. Production Possibilities Curve • For Shirtland, the trade-off is three shirts for every computer chip.

  7. Production Possibilities Curve • For Chipland, there is a one-for-one trade-off between the two goods.

  8. Comparative Advantageand the Terms of Trade • The nation with the lower opportunity cost has a comparative advantage, which is the ability of one nation to produce a particular good at an opportunity cost that is lower than the opportunity cost of another nation in producing the same good. • The terms of trade are the rate at which two goods will be exchanged.

  9. The Consumption Possibilities Curve • The consumption possibilities curve shows the combinations of two goods that a nation can consume when it specializes in producing one good and trades with another nation.

  10. Protectionist Policies • Four common import-restriction policies are: • An outright ban on imports. • An import quota, or a limit on the amount of a good that can be imported. • Voluntary export restraints, where a nation voluntarily decreases its exports in an attempt to avoid more restrictive policies. • A tariff, or a tax on imported goods.

  11. Quotas and VoluntaryExport Restraints • An import quota is a limit on the amount of a good that can be imported. • A scheme under which an exporting country voluntarily decreases its exports is a voluntary export restraint (VER).

  12. Price Effects of VERsfor Japanese Cars • Many European nations use VERs to limit the number of Japanese cars imported. The VERs increase the price of Japanese cars.

  13. NAFTA and the Giant Sucking Sound • The North American Free Trade Agreement (NAFTA) took effect in January 1999. • NAFTA will gradually phase out tariffs and other trade barriers between the United States, Mexico, and Canada. • Economists predicted that trade between the United States and Mexico would increase both imports from Mexico and exports to Mexico.

  14. Trade Data for theUnited States and Mexico

  15. Rationales for Protectionist Policies • Three possible motivations for policies that restrict trade are: • To shield workers from foreign competition. • To nurture “infant” industries until they mature. • Learning by doing is the knowledge gained during production, resulting in increases in productivity. • Infant industry is a new industry that is protected from foreign competitors. • To help domestic firms establish monopolies in world markets.

  16. Are Foreign ProducersDumping Their Products? • Dumping is a situation in which the price a firm charges for a product in a foreign market is lower than either the price it charges for that product in its home market or the product’s production cost. • Why do firms dump? • Price discrimination. • Predatory pricing: cutting prices in an attempt to drive rival firms out of business.

  17. Recent Trade Agreements • North American Free Trade Agreement (NAFTA). • World Trade Organization (WTO). • European Union (EU). • Asian Pacific Economic Cooperation (APEC).

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