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micro economics chapter 26

26
International Trade

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Some Key Trade Facts

• U.S. trade deficit in goods
• $529 billion in 2015
• U.S. trade surplus in services
• $220 billion in 2015
• Canada largest U.S. trade partner
• Trade deficit with China
• $366 billion in 2015
• Exports are 13% U.S. output
LO1



Economic Basis for Trade

• Nations have different resource




LO2

endowments
Labor-intensive goods
Land-intensive goods
Capital-intensive goods


Comparative Advantage

• Assumptions

• Two nations
• Same size labor force
• Constant costs in each country
• Different costs between countries

• Comparative Advantage

• Country produces good with lowest
domestic opportunity cost
• Total output is greatest

LO2


Comparative Advantage

• Case for free trade
• Increase total output
• Efficient allocation of resources
• Promote competition


LO2







LO4

Trade Barriers and Export
Subsidies
Tariffs
• Revenue tariff
• Protective tariff
Import quota
Nontariff barrier (NTB)
Voluntary export restriction
(VER)
Export subsidy


The Case for Protection

• Military self-sufficiency
• Diversification for stability
• Infant industry
• Alleged exception to free trade
• Protection against dumping
• Increased domestic employment
• Smoot-Hawley Tariff Act
• Cheap foreign labor
LO5


GATT

• Three principles
• Equal, nondiscriminatory trade
between member nations
• Reduction in tariffs
• Elimination of import quotas

LO5


WTO

• Established by Uruguay Round of




LO5

GATT
161 member nations in 2015
Oversees trade agreements and rules
on disputes
Critics argue may allow nations to
circumvent environmental and worker
protection laws


European Union

• Initiated in 1958 as Common Market
• Abolished tariffs and import quotas




LO5

between member nations
Established common tariff with nations
outside the EU
Created Euro Zone with one currency
Increased output, faster economic growth


NAFTA

• Agreement between U.S., Canada,




LO5

Mexico
Establishes free trade zone between
the countries
Trade has increased in all countries
Enhanced standard of living


Trade Adjustment and Offshoring

• Trade Adjustment Assistance Act
• Designed to help individuals hurt by



LO5

international trade
• Increases political support for reducing
trade barriers
Offshoring of jobs
• Shifting of work previously done by
American workers to workers abroad



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