SECTION FIVE - INTERNATIONAL TRADES.pptx

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1. Section 5 INTERNATIONAL TRADE The benefits of free trade Basic concepts Trade barriers Export policies

2. Objectives Explain how absolute advantage and comparative advantage differ; Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage Discuss how trade can expand a society’s consumption opportunities. List the advantages and disadvantages of free trade. Describe the likely effects of restriction & explain why countries sometimes follow restriction policies. 2

3. Basic Concepts Domestic Price The equilibrium price of a good in the domestic market World Price The equilibrium price of a good in the world market 3

4. Basic Concepts Absolute Advantage The ability of a person or a country to produce a good using less input than other person or country. Comparative Advantage The ability of a person or a country to produce a good with lower opportunity cost than other person or country. The opportunity cost of a X = amount of Y that could be produced using the labor needed to produce one X 4

5. Basic Concepts Option X (Cell phones) Y (DVDs) A 15 B 1 14 C 2 12 D 3 9 E 4 5 F 5

6. Moving from A to B , 1 cell phone costs 1 DVD. Basic Concepts

7. Basic Concepts The opportunity cost of a cell phone increases as more cell phones are produced

8. Basic Concepts Each good should be produced by the individual/country that has the smaller opportunity cost of producing that good Specialize according to comparative advantage 8 Principle of Comparative Advantage

9. Our Example Production Possibilities in the U.S. The U.S. has 50,000 hours of labor available for production, per month Producing 01 computer requires 100 hours of labor Producing 01 ton of wheat requires 10 hours of labor 9 Production Possibilities in Japan. Japan has 30,000 hours of labor available for production, per month Producing 01 computer requires 125 hours of labor Producing 01 ton of wheat requires 25 hours of labor Two countries : The U.S. and Japan Two goods : Computer and Wheat One resource : Labor, measured in hours

10. Our Example Questions: What kind of goods does the US/Japan have an absolute advantage in the production of? What kind of goods does the US/Japan have a competitive advantage in producing? How many goods will each country produce on its own ? How many goods will they exchange with the other country? How does this exchange benefit each country? 10

11. Our Example The US has an absolute advantage over Japan in both computer production and wheat production Producing a ton of wheat uses 10 labor hours in the U.S. vs. 25 in Japan Producing one computer requires 125 labor hours in Japan, but only 100 in the U.S. The US has a comparative advantage in wheat production because: The OC of 1 ton of wheat in the US is 1/10 of a computer The OC of 1 ton of wheat in Japan is 1/5 of a computer The US should export Wheat 11 Japan has a comparative advantage in computer production because: OC of making a computer in the US is 10 tons of wheat OC of making a computer in Japan is 5 tons of wheat Japan should export Computers

12. Our Example US PPF : 500 computers, 0 wheat 5000 tons of wheat, 0 computer Any other combination of computer & wheat 2,500 tons of wheat, 250 computers 3,400 tons of wheat, 160 computers Japan PPF 240 computers, 0 wheat 1200 tons of wheat Any other combination of computer & wheat: 120 computers and 600 tons of wheat 4,000 100 5,000 2,000 1,000 3,400 500 160 300 400 Computers Wheat (tons) Computers Wheat (tons) 2,000 600 240 120 300 US PPF : 100C + 10W = 50.000 Japan PPF: 125C + 25W = 30.000

13. Our Example- Without trade Suppose the U.S. would produce 160 computers and 3,400 tons of wheat. Without trade: U.S. consumers get 160 computers and 3400 tons wheat 13 Suppose Japan uses half its labor to produce each good. Then it will produce 120 computers and 600 tons of wheat. Without trade: Japanese consumers get 120 computers and 600 tons wheat

14. Our Example- With trade Suppose the U.S. would produce 160 computers and 3,400 tons of wheat. Without trade: U.S. consumers get 160 computers and 3400 tons wheat The U.S has a comparative advantage in wheat production, so U.S. exports 700 tons of wheat and imports 110 computers from Japan 14 Suppose Japan would produce 240 computers, 0 tons of wheat. Without trade: Japanese consumers get 240 computers and 0 tons wheat Japan has a comparative advantage in computer production, so Japan exports 110 computers and imports 700 tons wheat from the U.S

15. Our Example- U.S. Consumption With Trade 15 2700 270 = amount consumed 110 + imported 700 – exported 3400 160 produced wheat computers 4,000 100 5,000 2,000 1,000 3,400 500 160 300 400 Computers Wheat (tons) 270 2700

16. Our Example- Japan Consumption With Trade 16 700 130 = amount consumed 700 + imported 110 – exported 240 produced wheat computers Computers Wheat (tons) 2,000 1,000 200 100 300 130 700

17. Our Example- Trade Makes Both Countries Better Off 17 200 2700 2500 wheat 20 270 250 computers gains from trade consumption with trade consumption without trade U.S. 100 700 600 wheat 10 130 120 computers gains from trade consumption with trade consumption without trade Japan

18. The benefits of free trade Trade can bring mutual benefits for all participants because it allows people to specialize in producing the good that they have comparative advantage. When each country specializes in the good(s) in which it has a comparative advantage Total production in all countries is higher The world’s “economic pie” is bigger All countries can gain from trade 18

19. The benefits of free trade Export 19 When a country exports a good, domestic producers are better off while domestic consumers will have to pay a higher price. Export increases the net social benefit. Equilibrium without trade Exports from one country equal the difference between the domestic quantity supplied and the domestic quantity demanded at the world price

20. The benefits of free trade Export 20 Equilibrium without trade Before trade CS = A+B PS = C NSB (total surplus)= A+ B+ C

21. The benefits of free trade Export 21 Equilibrium without trade After trade CS = A PS = C + B + D NSB (total Surplus) = A+ B+ C + D

22. The benefits of free trade Export 22 Before trade CS = A+B PS = C NSB (total surplus)= A+ B+ C After trade CS = A PS = C + B + D NSB (total Surplus) = A+ B+ C + D CS decrease: domestic consumers are worse off PS increase: domestic producers are better off NSB increase: Gov is better off

23. When a country imports a good, domestic producers are worse off while domestic consumers will have to pay a lower price. Import increases the net social benefit. Price Quantity Domestic Supply World price Equilibrium without trade Price with trade Price without trade A C B Domestic Demand Import D Domestic quantity supplied Domestic quantity demanded 23 The benefits of free trade Import Imports equal the difference between the domestic quantity demanded and the domestic quantity supplied at the world price.

24. The benefits of free trade Import Before trade CS = A PS = B + C NSB = A+ B+ C After trade CS = A + B + D PS = C NSB = A+ B+ C + D CS increase: domestic consumers are better off PS decrease: domestic producers are worse off NSB increase: Gov is better off

25. Other benefits of international trade Increase the diversity of goods and services. Benefits from economies of scale. Increase the level of competition. Promote innovations. 25

26. Trade barriers Impacts of tariff Tariffs are taxes on imported goods and services. A tariff makes the price of an imported good or service higher than the world price. Price Quantity Import after tax Domestic Supply World price Tariff         Equilibrium before trade A B C D E F G Domestic demand Import before tax 26

27. Trade barriers Impacts of tariff Tariffs are taxes on imported goods and services. A tariff makes the price of an imported good or service higher than the world price. 27 Vietnam Import Tax and Duties: all you need to know - FNM Vietnam (fnm-vietnam.com)

28. Trade barriers Impacts of tariff Before tariff CS = A+B + C + D + E + F PS = G NSB = A+B + C + D + E + F + G After tariff CS = A + B PS = C + G NSB = A+ B+ C + G DWL = D + E + F

29. Trade barriers Impacts of import quota An import quota is the case when the government imposes a limit to the amount of a goods that a country might import during a certain period 29 F A G

30. Trade barriers Impacts of import quota Before Price: 5 Import with free trade: 40 Gain from trade: G After Price: 7 Import with quota: 15 CS shrink PS = A + B Importer profit: D DWL from quota: C + E

31. Trade barriers Non-tariff barriers Technical barriers to trade include standards regarding hygiene, health and safety that were used to limit trade. Technical barriers to trade A VER acts similar to an export quota imposed to a foreign producers. Voluntary Export Restrain (VER ) In a world where of increasing international integration, non-tariff barriers are becoming more widely used. 31

32. Export Policies Export subsidy is when the government subsidy domestic producers to promote export. An export subsidy  reduces the price paid by foreign importers , which means domestic consumers pay more than foreign consumers Export subsidy Price Quantity Export before subsidy Domestic Supply World price         Equilibrium without trade Price before export subsidy Price after export subsidy A B C D E F G Domestic Demand Export after subsidy 32

33. Export Policies Export tax is when the government impose a tax on export products. Export tax Price Quantity Domestic Demand Domestic Supply Export tax         Equilibrium without trade Price after tax Price before tax A B C D E F G Export after trade Export before trade 33

34. Export Policies Revenue Generation Stabilizing the Economy : Export taxes can be used as a tool to stabilize the economy during certain situations: Temporary Revenue Boost : When a country experiences a substantial devaluation of its exchange rate, it can implement temporary export taxes. Containing Private Expenditure : Export taxes can help control private expenditure during economic fluctuations. Promoting Domestic Industries : By taxing exports, governments can encourage domestic industries to focus on producing goods for the local market. This protectionist approach aims to safeguard local businesses and jobs. Balancing Trade : Export taxes can influence the quantity of exports. When a large country imposes an export tax, it lowers the domestic price of the product and raises the foreign price.  As a result, the quantity of exports decreases, which can help balance trade 2 . Creating Employment Opportunities : Export-oriented and export-related enterprises often create employment opportunities within a country.  By promoting exports, governments indirectly contribute to job growth Objectives of Export tax 34

35. Export Policies Export quota is when the government imposes a limit to the amount of a good or service that might be export during a certain period. Export quota 35 Import & Export in Vietnam (2023): Trade Policies & Regulation - OOSGA