Global Econ - Intro to Trade - lecture
-
Upload
katherine-sauer -
Category
Documents
-
view
212 -
download
0
Transcript of Global Econ - Intro to Trade - lecture
-
8/9/2019 Global Econ - Intro to Trade - lecture
1/27
International Trade: Basics
Dr. Katherine Sauer
Global Economic Issues
ECON 241
-
8/9/2019 Global Econ - Intro to Trade - lecture
2/27
I. Why do nations trade?
Why do nations export?- individuals/firms produce more than can be consumed
at home
- sellers could receive a higher price in a foreign market
Why do nations import?- some goods cant be produced at home (or not enough)
- some goods are produced at a lower cost or more
efficiently elsewhere
- consumers like variety
-
8/9/2019 Global Econ - Intro to Trade - lecture
3/27
II. Absolute and Comparative Advantage
Due to differences in supply conditions, a country may be ableto produce more of a good at a lower cost.
- superior technology
- large factor (resource) endowments
Absolute advantage is the ability to produce a good at the lowestcost.
It implies a potential trade pattern.
ex: tropical countries produce and export bananas
coastal countries produce and export seafood
It gives an incentive to specialize in a good and export it.
-
8/9/2019 Global Econ - Intro to Trade - lecture
4/27
Suppose Japan and Vietnam both produce rice.
- The demand for rice is roughly the same in each.
- Due to low production costs (abundant land suitable forgrowing rice), supply is higher in Vietnam.
Domestic Markets for Rice
P P
Q Q
Vietnam Japan
D D
S
S
Pv
Pj
-
8/9/2019 Global Econ - Intro to Trade - lecture
5/27
The domestic price of rice is lower in Vietnam.
Vietnam has an incentive to specialize in the production of riceand to export it.
Japanese consumers could get rice more cheaply if they
imported it from Vietnam.
So, suppose the two countries open up to trade.
- Once a country opens to trade, its domestic price no
longer matters.
- Only the world price will matter.
-
8/9/2019 Global Econ - Intro to Trade - lecture
6/27
The world price is determined by world supply and world
demand.
Vietnam
D
S
Pv
Pw
P
Q Q
P
S
D
World
-
8/9/2019 Global Econ - Intro to Trade - lecture
7/27
Vietnam Japan
D D
S
S
Pv
Pj
Pw Pw
P P
Q QQD QS QS QD
At the world price:
In Vietnam:
QS > QD
domestic surplus
export the surplus
In Japan:
QS < QD
domestic shortage
import to satisfy shortage
-
8/9/2019 Global Econ - Intro to Trade - lecture
8/27
How are consumers and producers affected by the countries
trading?
-
8/9/2019 Global Econ - Intro to Trade - lecture
9/27
Vietnam Japan
D D
S
S
Pv
Pj
Pw Pw
P P
Q QQD QS QS QD
Consumers used to pay Pv, now
they pay the higher Pw and buyless. (worse off, CS is less)
Producers used to sell at Pv, now
they sell at the higher Pw and sell
more. (better off, PS is greater)
Consumers used to pay Pj, now
they pay the lower Pw and buymore. (better off, CS is greater)
Producers used to sell at Pj, now
they sell at the lower Pw and sell
less. (worse off, PS is less)
-
8/9/2019 Global Econ - Intro to Trade - lecture
10/27
Vietnam Japan
D D
S
S
Pv
Pj
Pw Pw
P P
Q QQD QS QS QD
CS =
PS =
CS transferred to PS =
PS gained from trade =
TS =
CS =
PS =
PS transferred to CS =
CS gained from trade =
TS =
-
8/9/2019 Global Econ - Intro to Trade - lecture
11/27
Overall with trade:
The gain to producers is larger than the loss to consumers inVietnam.
Society as a whole in Vietnam is better off. (TS is larger)
The gain to consumers is larger than the loss to producers in
Japan.
Society as a whole in Japan is better off. (TS is larger)
-
8/9/2019 Global Econ - Intro to Trade - lecture
12/27
Summary:
1) Differences in supply conditions across countries lead to
complementary patterns of absolute advantage.
2) Complementary patterns of absolute advantage lead to
complementary patterns of trade.
superior technology
in a sector
large factor
endowments in a
sector
and/or
absoluteadvantage in
a sector
tendency toexport from
that sector
3) Trade can make countries as a whole better off, but there are
winners and losers among producers and consumers.
-
8/9/2019 Global Econ - Intro to Trade - lecture
13/27
Absolute advantage alone is not sufficient to fully explain
international trade.
- The opportunity cost of producing an item may
exceed the cost of trading for it.
An opportunity cost is the value of everything that must
be sacrificed in order to get something.
International trade is based on comparative advantage.
Comparative Advantage is the ability to produce at the lowest
opportunity cost.
-
8/9/2019 Global Econ - Intro to Trade - lecture
14/27
Even if a nation has absolute advantage in nothing, it can have a
comparative advantage.
When countries specialize in producing goods they have
comparative advantage in, and then trade those goods, they can
consume more goods and services than they could produce on
their own.
In a nutshell, this is why international trade is good and can be
good for all countries involved.
-
8/9/2019 Global Econ - Intro to Trade - lecture
15/27
III. Trade in Theory and in Practice
In reality, specialization and trade dont work exactly as thetheories of absolute and comparative advantage suggest:
- no country specializes exclusively in the production
and export of a single product
- countries produce at least some goods that could be
produced elsewhere more efficiently
- a lower income country may be able to produce morecheaply than a high income country but may not be able
to identify potential customers or to transport the item
cheaply or quick enough
-
8/9/2019 Global Econ - Intro to Trade - lecture
16/27
However, in general
Countries with a relative abundance of low-skilled labor tend to
specialize in and export items having low-skilled labor as a
major cost component.
Countries with a relative abundance of capital tend to specialize
in and export items having capital as a major cost component.
-
8/9/2019 Global Econ - Intro to Trade - lecture
17/27
IV. Trade Pattern
(what a country imports and exports and who its trading partners are)
Indiaexports: engineering goods, gems/jewelry, textiles, agricultural
goods, chemicals (US, China, UAE, UK)
imports: petroleum, capital goods, gold & silver, electronics,
gems (US, Belgium, China, Singapore)
Chile
exports: copper, fruit, paper products
(US, Japan, China, South Korea, Netherlands)
imports: intermediate goods, capital goods, consumer goods
(Argentina, US, Brazil, China, Germany)
-
8/9/2019 Global Econ - Intro to Trade - lecture
18/27
Bangladesh
exports: clothing, fish, jute goods, leather
(US, Germany, UK, France, Italy)
imports: capital goods, textiles & yarn, fuels, cereal & dairy goods
(India, China, Singapore, Kuwait, Japan)
Germanyexports: vehicles, machinery, chemicals, telecoms technology,
electricity devices
(France, US, UK, Italy, Netherlands, Belgium)
imports: chemicals, vehicles, fuels, machinery, computer
technology (France, Netherlands, US, Italy, UK, China)
-
8/9/2019 Global Econ - Intro to Trade - lecture
19/27
China
exports: office equipment, telecoms equipment, clothing,
electrical machinery(US, Hong Kong, Japan, South Korea, Germany)
imports: electrical machinery, petroleum products, professional
& scientific instruments, office equipment
(Japan, Taiwan, South Korea, United States, Germany)
Kenya
exports: horticultural products, tea, coffee, fish products
(Uganda, UK, US, Netherlands)
imports: industrial supplies, machinery & transport equipment,
consumer goods, food and drink
(UAE, Saudi Arabia, South Africa, US)
-
8/9/2019 Global Econ - Intro to Trade - lecture
20/27
V. The Relative Importance of Trade
Over time, trade has accounted for a larger and larger proportion
of world GDP.
year world exports world GDP exports as % GDP
1970 $317b $3,378b
1980 $2,408b $11,742b
1990 $4,256b $22,721b
2000 $7,819b $31,649b
2006 $14,464b $47,766b
9.4%20.5%18.7%
24.7%
30.3%
For an individual country, the total trade value as a share of GDP
is an indication of how important trade is in the countrys
economy.
-
8/9/2019 Global Econ - Intro to Trade - lecture
21/27
total trade value = exports value + imports value
trade value as a share of GDP = total trade value x 100GDP
Country GDP EX IM .
China $2,229b $762b $660b
Djibouti $0.702b $0.40b $0.32b
Thailand $178b $110b $118b
TTV IM
Trade value %GDP %GDP
$1,422b$0.72b
$228b
63.8%103%
128%
30%47%
66%
Another useful measure is the ratio of imports to GDP.
-
8/9/2019 Global Econ - Intro to Trade - lecture
22/27
VI. The Trade Balance
The trade balance is the difference between the value of acountrys exports and the value of its imports. It is also called net
exports.
TB = EX IM
If exports > imports, then there is a trade surplus.
If exports < imports, then there is a trade deficit.
When you hear that a countrys trade balance has worsened, it
means that there is less of a surplus or more of a deficit.
- imports are increasing
or
- exports are decreasing
-
8/9/2019 Global Econ - Intro to Trade - lecture
23/27
Factors that influence a countrys trade balance:
1) prices of goods manufactured at home
- if home goods are relatively expensive, then a country
will import cheaper goods
2) exchange rates
- if a countrys currency is strong against other currencies,then it is cheap to import while its exports are
expensive to other countries
3) trade agreements
- when a country signs a Free Trade Agreement, bothits exports and imports will likely increase
-
8/9/2019 Global Econ - Intro to Trade - lecture
24/27
4) trade barriers
- if a country imposes tariffs on imports, then imports
are reduced
- if a country subsidizes exports, then exports will rise
5) the business cycle at home or abroad
- in an expansion at home, consumer incomes are
increasing, in general this will increase imports
- in an expansion abroad, consumer incomes elsewhere
are increasing so the home country exports more
Most economists dont believe that trade deficits/surpluses are
inherently good or bad. The economic impact of a surplus or
deficit depends on the specific circumstances surrounding it.
-
8/9/2019 Global Econ - Intro to Trade - lecture
25/27
Arguments:
A Trade Deficit is Bad (a Trade Surplus is Good)
A trade deficit
- signifies economic weakness because it reflects anexcessive reliance on foreign products
- represents an expenditure of future growth because
whenever a nation purchases more than it produces,
funds that could have been used for investment (future
growth) are being used for consumption in the present
- large trade deficits create conditions favorable for a
financial crisis
Ex: In 8/06, New Zealand announced a wider than expected
trade deficit. The NZdollar lost value.
-
8/9/2019 Global Econ - Intro to Trade - lecture
26/27
A Trade Deficit may be Good
A trade deficit means
- consumers can enjoy a higher standard of living than if
they were limited to domestically produced goods
- could be a sign of economic strength because imports
are known to increase during times of economic growth
In industrial countries, trade deficits have not sparked economic
crisis.
Ex: In Mexico, the July 2006 trade deficit was $319m and in
August it was $783m. The increase in imports was due to an
increase in consumer wages. This import increase suggests that
domestic demand is strengthening.
-
8/9/2019 Global Econ - Intro to Trade - lecture
27/27
A Trade Surplus may not be Good
A trade surplus could mean a country is too reliant on foreigndemand for its goods.
The surplus could be the result of an undervalued currency.
Ex: In August 2006, China announced a trade surplus of$18.8billion. It has been accused of keeping its currency
undervalued in order to make its exports cheaper.