WHY DO NATIONS TRADE?

WHY DO NATIONS TRADE?

TOTAL NATIONAL WELFARE IS INCREASED THROUGH TRADING ACTIVITIES.

COMPARATIVE ADVANTAGE.

PRODUCE WHAT YOU PRODUCE WELL AND TRADE IT FOR THINGS YOU DO NOT PRODUCE WELL.

COST OF PRODUCTIONPRICE OF OUTPUT

COMPARATIVE ADVANTAGE DETERMINED BY FOUR FACTORS.

COMPARATIVE ADVANTAGE DETERMINED BY FOUR FACTORS.

NATURAL RESOURCE BASE

COMPARATIVE ADVANTAGE DETERMINED BY FOUR FACTORS.

NATURAL RESOURCE BASELOCATION RELATIVE TO MARKETS

COMPARATIVE ADVANTAGE DETERMINED BY FOUR FACTORS.NATURAL RESOURCE BASELOCATION RELATIVE TO MARKETSPRODUCTION EFFICIENCIES (INPUT/OUTPUT)

COMPARATIVE ADVANTAGE DETERMINED BY FOUR FACTORS.NATURAL RESOURCE BASELOCATION RELATIVE TO MARKETSPRODUCTION EFFICIENCIES (INPUT/OUTPUT)

TRADE POLICIESTARIFFS - EXCHANGE RATES

Why trade takes place?

price

quantity

S

D

price

quantity

price

quantity

A B

SS

D

D

why trade takes place.price

quantity

price

quantity

A B

WORLD PRICE

D

D

SS

why trade takes place.price

quantity

price

quantity

A B

WORLD PRICE

EXPORTIMPORT

D

D

SS

SIMPLE TWO COUNTRY /TWO

PRODUCT MODEL --FRANCE AND THE

U.S.A.

TWO PRODUCTS ARE WINE AND CORN

THE ONLY INPUT IS LABOR

IF ONE MAN-DAY OF LABOR IS USED TO PRODUCE CORN IN THE UNITED STATES HE CAN PRODUCE 60 BUSHELS (6 UNITS).

IF THE SAME MAN-DAY IS USED TO PRODUCE WINE, HE CAN PRODUCE 2 CASKS (2 UNITS).

THUS ONE CASK OF WINE EXCHANGES FOR 3 UNITS OF CORN.

IN FRANCE ONE MAN-DAY OF LABOR WILL PRODUCE ONLY 20 BUSHELS OF CORN (2 UNITS).

ONE MAN-DAY OF LABOR WILL PRODUCE ONLY 1 CASK OF WINE.

IN FRANCE ONE CASK OF WINE EXCHANGES FOR TWO UNITS OF CORN.

WILL TRADE TAKE PLACE?YES!

IF FRANCE SENDS THE U.S.A. ONE CASK OF WINE, U.S. PRODUCERS WILL BE WILLING TO SHIP THEM 3 UNITS OF CORN. MORE THAN THE FRENCH COULD PRODUCE AT HOME FOR THE LABOR RELEASED FROM PRODUCING THE CASK OF WINE.

IF THE U.S. SENDS TWO UNITS OF CORN TO FRANCE, THEY WILL BE WILLING TO SEND A CASK OF WINE TO THE UNITED STATES.

THE TECHNICAL RATIOS ARE:1 CASK : 3 UNITS (U.S.A.)1 CASK : 2 UNITS (FRANCE)AN EXCHANGE RATIO BETWEEN THESE RATIOS, SUCH AS 1 CASK

: 2.5 UNITS REPRESENTS A PROFITABLE EXCHANGE.

HOW TRADE IS RESTRICTED

HOW TRADE IS RESTRICTED

TARIFFS - TAX ON THE IMPORT OF GOODS

HOW TRADE IS RESTRICTED

QUOTA - A QUANTITATIVE RESTRICTION

HOW TRADE IS RESTRICTED

EMBARGO -- USUALLY DONE FOR POLITICAL REASONS

HOW TRADE IS RESTRICTED --

HEALTH REGULATIONS

REASONS FOR PROTECTION

PROTECT A NEW INDUSTRYWE MUST PROTECT AN INEFFICIENT "INFANT INDUSTRY" NOW BUT IT WILL EVENTUALLY BECOME EFFICIENT

REASONS FOR PROTECTION

NATIONAL SECURITYWE NEED TO PROTECT OUR STEEL INDUSTRY BECAUSE IT MAY BE VITAL FOR OUR NATIONAL DEFENSE

REASONS FOR PROTECTION

PROTECT THE NATIONAL HEALTHWE CAN NOT LET AMERICAN APPLES IN BECAUSE THEY HAVE BEEN CONTAMINATED BY PESTICIDES

REASONS FOR PROTECTION

PROTECT AGAINST UNFAIR TRADE POLICY

COUNTRIES ARE "DUMPING" THEIR PRODUCT INTO OUR MARKETS TO FORCE OUR PRODUCERS OUT OF BUSINESS.

REASONS FOR PROTECTION

PROTECT DOMESTIC PROGRAMSSOMETIMES A GOVERNMENT WILL SUPPORT DOMESTIC PRODUCERS AT ARTIFICIALLY HIGH PRICES. IMPORT RESTRICTIONS MUST BE IN PLACE SO OUTSIDERS CAN NOT TAKE ADVANTAGE OF THOSE HIGH PRICES.

REASONS FOR PROTECTION

PROTECT BALANCE OF PAYMENTSWHEN A NATION'S PAYMENTS TO FOREIGNERS EXCEEDS ITS EARNINGS FOR THEM, IT HAS A PROBLEM. THIS CAN RESULT IN A CURRENCY DEVALUATION.

REDUCE IMPORTS -- REDUCE THE IMBALANCE OF PAYMENTS

REASONS FOR PROTECTION

PROVIDE REVENUE

REASONS FOR PROTECTION

PROTECT AGAINST PAINFUL ECONOMIC ADJUSTMENT