CHAPTER7Comparative Advantage and theGains from International TradeChapterOutlineandLearningObjectives7.1The United States in the中International Economy7.2Comparative Advantage inInternational Trade7.3How Countries Gain fromInternational Trade7.4Government Policies ThatRestrict International Trade7.5TheArgumentsoverTradePoliciesandGlobalization
1 Chapter Outline and Learning Objectives 7.1 The United States in the International Economy 7.2 Comparative Advantage in International Trade 7.3 How Countries Gain from International Trade 7.4 Government Policies That Restrict International Trade 7.5 The Arguments over Trade Policies and Globalization CHAPTER 7 CHAPTER Comparative Advantage and the Gains from International Trade
Is It Right to Save Jobs in the Tire Industry?Between 2004 and 2008, Chinese tire companies tripled exports tothe United States..In fall 2009, President Obama responded with a tariff on tireimports from China of 35% of the tire's value.. Why? This would protect U.S. tire producing firms, and fewer tireindustryworkers would losetheir jobs.China responded by raising tariffs on some U.S. goodsIn 2012, President Obama allowed the tariff to expire. Tire importsfrom China startedtoriseagainDid the tariffs in the tire industry make us better or worse off?2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 2 Is It Right to Save Jobs in the Tire Industry? Between 2004 and 2008, Chinese tire companies tripled exports to the United States. • In fall 2009, President Obama responded with a tariff on tire imports from China of 35% of the tire’s value. • Why? This would protect U.S. tire producing firms, and fewer tire industry workers would lose their jobs. China responded by raising tariffs on some U.S. goods. In 2012, President Obama allowed the tariff to expire. Tire imports from China started to rise again. Did the tariffs in the tire industry make us better or worse off?
The United Statesin the International Economy7.1LEARNINGOBJECTIVEDiscuss the role of international trade in the U.S. economy.2015PearsonEducafion.lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 3 The United States in the International Economy 7.1 Discuss the role of international trade in the U.S. economy
The United Statesand International TradeInternational trade has grown more and more important to the worldeconomyoverthepast50years.Falling shipping and transportation costs have made internationaltrade moreprofitable and desirable.Traditionally, countries imposed high tariffs on imports, believingthat suchmeasured madetheir ownfirms and consumers better offBut that meant their exports were similarlytaxedTariff: A tax imposed by a government on importsImports: Goods and services bought domestically but produced inothercountries.Exports: Goods and services produced domestically but sold in othercountries.2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 4 The United States and International Trade International trade has grown more and more important to the world economy over the past 50 years. Falling shipping and transportation costs have made international trade more profitable and desirable. Traditionally, countries imposed high tariffs on imports, believing that such measured made their own firms and consumers better off. But that meant their exports were similarly taxed. Tariff: A tax imposed by a government on imports Imports: Goods and services bought domestically but produced in other countries. Exports: Goods and services produced domestically but sold in other countries
The Increasing Importance of Trade to the U.SSince 1970, bothimports andPercentageexports have beenofGDP20%steadily rising as aImportsasa18fraction of U.S.percentageofGDP16gross domestic14product (GDP).12108International tradeExportsasa6percentageofGDPhas been4becoming a more2and more0197019751980198519901995200020052010important part ofthe AmericanFigure 7.1InternationaltradeisofeconomyincreasingimportancetotheUnitedStates@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 5 The Increasing Importance of Trade to the U.S. Since 1970, both imports and exports have been steadily rising as a fraction of U.S. gross domestic product (GDP). International trade has been becoming a more and more important part of the American economy. International trade is of increasing importance to the United States Figure 7.1
LeadingExportingCountries,2012Percentage of 10%worldexports987The rapid growth6of the Chinese5economyhas4made it the32world's largestexporter, with0TheUnitedSouthChinaUnitedGermanyFranceJapan9.3% of worldStatesNetherlandsKingdomKoreaexports.Chinatookoverthe lead from theU.S., whichFigure 7.2The eight leadingaccounts for 9.2%exporting countries,2012of world exports@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 6 Leading Exporting Countries, 2012 The rapid growth of the Chinese economy has made it the world’s largest exporter, with 9.3% of world exports. China took over the lead from the U.S., which accounts for 9.2% of world exports. The eight leading exporting countries, 2012 Figure 7.2
International Trade Asa Percentageof GDPExportsand90%ExportsasapercentageofGDPimportsasaImportsasapercentageofGDp80percentage ofGDP706050However, trade is40less important to3020the U.S. (and10China as well)0TheUnitedBelgiumGermanyItalyFranceChinaUnitedJapanthan it is to otherStatesNetherlandsKingdomcountrieslargelyduetotherelativesizes ofFigure 7.3Internationaltradeasaeconomies.percentageofGDP@2015PearsonEducation,lnc
© 2015 Pearson Education, Inc. 7 International Trade As a Percentage of GDP However, trade is less important to the U.S. (and China as well) than it is to other countries—largely due to the relative sizes of economies. International trade as a percentage of GDP Figure 7.3
MakingGoodyear and the Tire TarifftheConnectionYou would think Goodyear, a major U.S. tire manufacturer, wouldhave benefited strongly from reduced competition due to the tiretariff.However a spokesman for Goodyear said:"The tariffs didn't have any material impact on our North Americanbusiness.The stuff coming in from China is primarilylow end.Wegot out of that market years ago."Even worse, tires from some of Goodyear's factories in China weresubject to the tariff!At the beginning of 2013, with the tire tariff expiring, Goodyear'sprofits rose more than 50percent, despite imports of Chinese tires2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 8 Making the Connection Goodyear and the Tire Tariff You would think Goodyear, a major U.S. tire manufacturer, would have benefited strongly from reduced competition due to the tire tariff. However a spokesman for Goodyear said: “The tariffs didn’t have any material impact on our North American business. The stuff coming in from China is primarily low end. We got out of that market years ago.” Even worse, tires from some of Goodyear’s factories in China were subject to the tariff! At the beginning of 2013, with the tire tariff expiring, Goodyear’s profits rose more than 50 percent, despite imports of Chinese tires
ComparativeAdvantageinInternational Trade7.2LEARNINGOBJECTIVEUnderstandthedifferencebetween comparative advantage andabsoluteadvantageininternationaltrade@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 9 Comparative Advantage in International Trade 7.2 Understand the difference between comparative advantage and absolute advantage in international trade
Comparativeand Absolute AdvantageIn Chapter 2we introduced the concept of comparativeadvantagebeing able to produce something at a lower opportunity cost thansomeone else.In thetable,Japanhas anabsolute advantageinproducing bothcell phones and tablet computers: it can produce each with fewerresources (hours of work) than can the U.S. (or equivalentlyproduce more with the same amount of resources).But comparativeadvantagemeansthattradecanstillbeadvantageousforbothnationsOutputperHourofWorkCellPhonesTablet Computers126Japan24United StatesTable7.1Anexample of JapaneseworkersbeingmoreproductivethanAmericanworkers10@2015PearsonEducation,lnc
© 2015 Pearson Education, Inc. 10 Comparative and Absolute Advantage In Chapter 2 we introduced the concept of comparative advantage: being able to produce something at a lower opportunity cost than someone else. In the table, Japan has an absolute advantage in producing both cell phones and tablet computers: it can produce each with fewer resources (hours of work) than can the U.S. (or equivalently, produce more with the same amount of resources). But comparative advantage means that trade can still be advantageous for both nations. An example of Japanese workers being more productive than American workers Table 7.1 Output per Hour of Work Cell Phones Tablet Computers Japan 12 6 United States 2 4