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Appendix A International Trade

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I. Introduction
     A. The United States is the largest exporter in the world.
     B. In 1991 exports amounted to $421 billion or 7.5% of GDP.
     C. About 20% of the economic growth which took place during the late 1980's and early 1990's 
         occurred because of increased exports. 
     D. Foreign nations tend to specialize in manufactured goods
demanded by U.S. consumers because the U.S. 
          is the largest wealthy mass consumer market in the world.
 
     E. The United States imports more than it exports and the resulting debt (cumulative deficit) is approaching one
          trillion dollars. This debt has provided foreigners with the dollars necessary to buy billions of dollars worth of
          U.S. real estate (especially in Hawaii  and California), companies (especially new high-tech start-ups), and 
         financial assets (stocks and bonds including U.S. Treasuries).
 
     F. Most economists feel free (of restrictions) international trade is of benefit to nations. Individuals within a 
         nation may be hurt as foreign goods produced by foreign workers
replace their domestic counterparts while
         politicians argue over the ramifications of allowing creative destruction to occur.
        G. "Exorbitant Privilege," old article on why we are not Greece is still relevan

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silk road, trade routes  across Eurasia from Wiki

II. Absolute and comparative advantage 
    A. Absolute advantage exists when one nation can produce a good or service more economically than another. 
      B. In the example
below, the United States has an absolute advantage over Canada in the production of both 
           computers (2 hours < 3 hours) and shirts (4 hours < 5).

          Hours to Produce 
Computers         Shirts
      (1)                 (2)
Hours Available
(3)

Maximum Computers 
Produced
3/1

Maximum  Shirts 
Produced
3/2

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U.S.   2 hours 4 hours 1200 1200/2 = 600 1200/4 = 300
Canada   3 hours 5 hours 120 120/3 = 40 120/5 = 24

     C. Comparative advantage exists when one nation has a lower opportunity cost than another in the production
          of a good or service.
 
         1. Constant opportunity costs will result in the linear production
possibility frontiers (PPF) depicted below.

     

         2. The opportunity cost of an item on the x-axis (shirts) is measured by the absolute value of the PPF's 
             slope (2 and 5/3 respectively).
         3. The opportunity cost of an item on the y-axis (computers) is the reciprocal of the x-axis slope, 1/2 and
         3/5 respectively.
         4. When deciding which country should produce goods, the country with the lowest opportunity cost is 
             said to be relatively more efficient and should produce the good.
         5. Canada is relatively more efficient producing shirts (5/3 < 2) and the U.S.
             is relatively more efficient at producing computers (1/2 < 3/5).
         6. Videos ACDC Economics
             a.
Comparative Advantage 1
             b.
Comparative Advantage 2
        7.  KAHN Video  Comparative Advantage and Absolute Advantage

 

 

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III. International specialization increases economic growth.
      A. Assume the world has enough shirts, and gains from international specialization will be directed toward
          
increased production of computers. Countries are currently producing at the midpoint of their PPF. 
      B. Canada, which has a comparative advantage in shirts, will produce only shirts.
      C. The United States will produce enough shirts to keep total production at 162 shirts and devote the rest of her
           resources to the production of computers.
      D. Specialization and gains from Trade KHAN ACADEMY

Original Production (half time spent on each)

After Specialization

             Computers                      Shirts

Shirts

         Computers                        

U.S.

600/2 = 300

600/4 = 150

(162-24) =138 shirts

138 x 4 = 552 hours

1200 - 552 =  648 hours

648/2 = 324

Canada

60/3 = 20

60/5= 12

120/5 = 24

0

Total

320

162

162

324

          1. Canada will produce 24 shirts (120 hrs / 5 hrs per shirt).
          2. United States shirt production will be 138 (162-24), 12 less than before specialization and trade.
          3. Net gain for the world is 4 computers.
    D.  Comparative Advantage and Trade from Jay Kaplan of the University of Colorado at Boulder is a more in depth presentation.
    E.  Consumer's and Producer's Surplus and Tariffs and Quotas Video   from ACDC Economics
V. Factors limiting international trade
      A. Transaction costs are often high because of transportation costs and the difficulty of working in a foreign market.
      B. Terms of trade (exchange ratio of goods) are difficult to negotiate and are limited to the boundaries set up by 
           comparative advantage.
      C. Protectionism is the prevailing attitude of many countries.
          1. National security requires maintaining productive capabilities for a wide variety of goods.
          2. Many workers are hurt by the structural unemployment caused by expanding international trade.
          3. Infant industries require protection from foreign competition.
          4. Industry must be protected from unfair foreign competition.
              a. Dumping must be stopped  
                   1) Dumping is when a nation sells goods abroad at below total costs covering their
                       variable costs and only a portion of their fixed costs.
                   2) Once variable costs are paid, any contribution to fixed costs will add to cash flow.
              b. Worker safety programs, health care costs, and environmental concerns make the exports of 
                  some countries more expensive than those of their foreign competitors who ignore these problems.

Videos from ACDC Economics
Balance of Payments
 
Foreign Exchange

Foreign Exchange Practices
 

 

Other Video Lectures
Tariffs and Quotas 1

Tariffs and Quotas 2

Tariffs and Quotas 3

Tariffs and Quotas 4

Tariffs and Quotas 5

 

 V. Capital and Current Account, Exchange Rates  Interact Learning Activity
VI. The Balance of Payments and Exchange Rates
 from Jay Kaplan of the University of Colorado at Boulder.
VII.
Treasure Island: The Hidden Elegance of Comparative Advantage from The Library of Economics  and Liberty.
VIII. For more information
         A.
Public Citizen | NAFTA - North America Free Trade Agreement has a liberal against NAFTA view.
         B.
NAFTA results lead to more free trade agreements, opportunities has the conservative pro NAFTA view.
         C.
The International Study Center from  Professor Steve Suranovic of George Washington University  has substantial information.
         D.
Free Trade Doesn't  Work book review
         E.
Germany’s path to growth: exports from tradereform.org
         F.
International Trade Lecture Notes from David Latzko of Penn State University
         G.
Only the Weak Survive import/export imbalances Nouriel Roubini, Project Syndicate (hat tip Mark Thoma)
         H.
Bernanke Translated WSJ, 11/18/10
            I . 2012 AP Econ Videos- You Can't Protect This

 

    IX. The Dollar 
         A. 

     B. Who Wins When the US Dollar Falls? NY Times

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