| UNIT FIVE |
CHAPTER 17
Gains from Trade
I.
Cross Country Differences in the Size of the Trade Sector
A. The size of trade
sector varies substantially across countries.
B. The trade sectors as
a share of the economy will tend to be larger for small countries than for large
countries.
II.
The Trade Sector of the United States
A. The size of the
trade sector has grown rapidly in recent years.
B. Both exports and imports were approximately 7 percent of the
economy in 1980. In 1998, exports
accounted for 13 percent of GDP output, while imports summed to 16.1 percent.
C.
Canada, Mexico, and Japan are the leading trading partners of the United
States.
III.
Gains from Specialization and Trade
A. Law of
comparative advantage: A group of individuals, regions, or nations can produce a
larger joint output if each specializes in the production of the goods for which
it is a low‑opportunity‑cost producer and trades for those goods for
which it is a high opportunity cost producer.
1.
International trade leads to mutual gain
because it allows each country to specialize more fully in the production of
those things that it does best.
2.
Trade permits each country to use more of its resources to produce those
goods that it can produce at a relatively low cost.
3.
With trade, it will be possible for the trading partners to consume a
bundle of goods that it would be impossible for them to produce domestically.
B. As long as
relative production costs of the two goods differ between two countries—for
example, U.S. and Japan—gains from trade will be possible.
C. In addition to
the gains derived from specialization in areas of comparative advantage,
international trade leads to gains from:
1.
Economies of Scale: International trade allows both domestic
producers and consumers to gain from reductions in per‑unit costs that
often accompany large‑scale production, marketing, and
distribution.
2.
More Competitive Markets: International trade promotes competition in
domestic markets and allows consumers to purchase a wide variety of goods at
economical prices.
IV.
Exports and Imports Are Linked
A. U.S. exports
provide Americans with the foreign exchange required to purchase imports.
B.
Similarly, U.S. imports provide foreigners with the dollars required to
buy things from Americans.
C.
Therefore, restrictions that limit one will also limit the other.
V.
Supply, Demand, and International Trade
A.
Impact of trade on markets where U.S. producers have a comparative
advantage.
B.
Impact of trade in markets where foreigners have a comparative
advantage.
C.
Summary: Supply, Demand, and Gains From Trade
1.
International trade and specialization result in lower prices (and higher
domestic consumption) for imported products and higher prices (and lower
domestic consumption) for exported products.
2.
Trade permits the residents of each nation to concentrate on the things
they do best (produce at a low cost), while trading for those they do least
well.
VI. Impact of Tariffs,
Quotas, and Other Trade Restrictions
A.
Trade restrictions promote inefficiency and reduce the potential gains
from exchange.
VII. Why Do Nations
Adopt Trade Restrictions?
A.
National Defense Argument
B.
Infant Industry Argument
C.
Dumping: The sale of goods abroad at a price below their cost (and below
their price in the domestic market of the exporting nation)
1.
Dumping is illegal under U.S. law.
2.
When considering the merits of anti-dumping restrictions, it is important
to remember that (a) firms with large inventories may find it in their interest
to offer goods at prices below their cost of production, (b) domestic firms are
permitted to engage in this practice, and (c) the lower prices associated with
dumping benefits domestic purchasers.
D.
Special Interests and Trade Restrictions
1.
Trade restrictions provide highly visible, concentrated benefits for a
small group of people, while imposing widely dispersed costs that are often
difficult to identify on the general citizenry.
2.
Politicians have a strong incentive to favor special interest issues,
even if they conflict with economic efficiency.
3.
The power of special‑interest groups provides the primary source
for trade restrictions.
VIII. Do Trade
Restrictions Protect Jobs and Promote Employment?
A. If foreigners
are unable to sell as much to Americans, then they will have fewer dollars with
which to buy from Americans. Therefore, when the volume of imports declines
there will be an automatic secondary effect—foreigners will have fewer dollars
with which to buy American goods
B.
Trade restriction do not “save” jobs, they merely reshuffle them.
Restriction will mean more Americans working in areas where we do not have a
comparative advantage.
IX.
Trade Restrictions Around the World
