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This chapter presents the analysis of absolute and comparative advantage and employs supply and demand analysis to explain the determination of the terms of trade. Arguments regarding free trade and globalization are discussed. The chapter concludes with a section on the dynamics of trade as illustrated by trade in cashmere.
Chapter Outline
Practical Constraints on Trade
Checkpoint: The Gains from Trade
The Terms of Trade
Part 1, Terms of Trade, Absolute and Comparative Advantage Problem, 3:00
Part 2, Terms of Trade, Absolute and Comparative Advantage Problem, 1:59
This video summarizes the idea of "terms of trade" when doing a comparative advantage problem.
Determining the Terms of Trade
The Impact of Trade
CEPR Seminar: Trade - What Are the Gains and Who Gets Them, 5:23
CEPR Economics Seminar Series: Basic Economics for Policy Analysis & Self Defense
Trade - What Are the Gains and Who Gets Them
Standard economic analysis shows that efficiency gains from trade liberalization are much smaller than most people have been led to believe; at the same time developing countries make costly concessions for this trade, and within the U.S. there has been an upward redistribution of income resulting from trade policy. This session looks at who gains and loses from trade policy and how, including:
l. The high cost of protectionism - in professional services, intellectual property and other areas where government interventions that redistribute income upward
2. The trade deficit and the overvalued dollar.
How Trade Is Restricted
Effects of Tariffs and Quotas
Tariffs and protectionism, 7:00
Cf. http://www.youtube.com/watch?v=dSQTbd2iJtY&feature=PlayList&p=36F5CC591354C474&playnext_from=PL&playnext=1&index=44
Checkpoint: The Terms of Trade
Arguments Against Free Trade
Traditional Economic Arguments
Infant Industry Argument
Antidumping
Low Foreign Wages
Made in Germany | Slovenia - booming economy, low wages, 5:04
National Defense Argument
Chinese and American Fragile Trade and Economic Ties, 5:53
Globalization Concerns
Globalization and Inequality (www.cgdev.org), 2:10
Nancy Birdsall, President of the Center for Global Development gives a brief overview of the issues and concerns surrounding the growing global Inequality resulting from Globalization.
Milton Friedman - Free to Choose 1990 - 1of 5 The Power of the Market PL 2/5
Trade and Domestic Employment
Trade and the Environment
Trade and Its Effect on Working Conditions in Developing Nations
Checkpoint: Arguments Against Free Trade
The Dynamics of Trade: Cashmere
Ideas for Capturing Your Classroom Audience
■ Put it in context. Illustrate U.S. International Trade in Goods and Services with the graph on this Foreign Trade Statistics page from the U.S. Census Bureau. This will give students an overview of the size of U.S. trade. The page is located at:
http://www.census.gov/indicator/www/ustrade.html.
Chapter Checkpoints
The Gains from Trade
Question: Since the 1990s, there has been a surge of interest in sports memorabilia. In particular, at baseball memorabilia shows, lines of people wait to pay for a baseball player’s autograph on a picture, baseball, or baseball card. All of this attention has increased the interest of kids in buying baseball cards. A natural corollary of this is the trading of baseball cards. Assume you have a set of baseball cards for the current year but are missing some. In particular, you are a Cardinals fan and have all of the Cardinals cards except Albert Pujols. Would you trade for it? If so, who would you trade with? What would you want to give up for the Pujols card? What would the Pujols card holder expect in return? Who is likely to trade a Pujols card? Do you think you could get a Pujols card by trading? Who benefits from the trade?
The point is to check that students can: apply their understanding trading baseball cards to comprehending international trade. Of particular interest is discerning that the same good might be worth more to one party than the other (which is what economists would call the “basis for trade” and how the terms of trade would be established. You can learn more about trading baseball cards at the Web site of the Baseball Card Shop, on the Web at http://baseballcardshop.net/.
The Terms of Trade
Question: When the government imposes a quota on a specific imported product,
who benefits and who loses?
The point is to check that students can: understand the costs and benefits of
restraints on trade and compare the effects of tariffs and quotas.
Arguments Against Free Trade
Question: “The biggest gains in export, imports, employment, and wages all
occurred during the 1990s, which was one of our greatest periods of economic
growth. Thus it is clear that trade benefits both consumers and the economy.”
Evaluate this statement.
The point is to check that students can: understand that trade benefits some and
imposes costs to others. This discussion also highlights the importance of context
in evaluating situations and policies (meaning, what gets attention in a recession
may not get attention when the economy is stronger).
Extended Examples in the Chapter
The Dynamics of Trade: Cashmere
Few people know that trade in cashmere has been changed dramatically by
removal of worldwide regulation of the textile industry. The winners appear to be
the Chinese, who have been developing their own cashmere industry to compete
with the previously predominant Scottish producers. As one might expect from the
analysis developed in the chapter, the effect has been competition, a loss of jobs in Scotland as the lower-cost Chinese goods have driven out the low end of what had been almost exclusively a Scottish market. Also, as one might expect, Scottish firms have been driven to increase quality and innovate. The example points out the dynamism of international trade in its effects on workers, producers, and consumers.
For another perspective on this topic, see the article by Evan Osnos titled “That
Low-Priced Cashmere Sweater Has a Hidden Cost” (The Seattle Times, December 8,
2006, available on the Web at: http://seattletimes.nwsource.com/html/nationworld/
2003498352_cashmere282.html).
Included in the article are important points about how the rise of China’s cashmere production has affected the environment, hence the “hidden cost” of the title.
Examples Used in the End-of-Chapter Questions
Question 4 references a study by Scott C. Bradford, Paul L. Grieco, and Gary Clyde
Hufbauer titled “The Payoff to America from Global Integration,” in C. Fred
Bergsten and the Institute for International Economics, The United States and the
World Economy (Washington: Institute for International Economics, 2005), Chapter
2. A follow-up article is available on the Institute’s site at http://www.petersoninstitute.
org/publications/papers/paper.cfm?ResearchID=738.
For Further Analysis
Comparing the Welfare Effects of Tariffs and Quotas
This example, as presented in the student handout at the end of this chapter, can be used as a small group exercise or as an individual exercise. It is designed to complement the text’s material on the effects of tariffs and quotas. It requires students to employ the welfare analysis used in previous chapters (you may want to assign the review from Chapter 13 in conjunction with this assignment. The handout focuses on calculating changes in consumer surplus but it is not difficult to extend it to calculations of producer surplus and deadweight losses if you wish.
Web-Based Exercise
The following assignment sends students to the Web site of the World Trade
Organization to learn more about it, particularly its functions. You can choose
whether or not to include the third part of the assignment depending on how extensive you would like the assignment to be.
Learn more about the World Trade Organization (WTO). Visit its Web site (at
http://www.wto.org) and answer the following:
1) What is the WTO?
2) Who belongs to the WTO and when was it started?
3) Choose a dispute in which the WTO was involved. Explain the issue, the
steps involved, and whether or not the issue was resolved.
Tips from a Colleague
Students tend to want simple statements like “free trade is a good thing,” and
sometimes are frustrated with having to weigh the costs and benefits. They also
may not appreciate that the degree of “protectionism” in the United States waxes
and wanes with changing circumstances, particularly having to do with jobs. You
may wish to have students investigate the positions on trade of different members
of Congress by way of making comparisons depending on the interests of the
states they represent.
References
Milton Friedman - Free to Choose 1990 - 1of 5 The Power of the Market PL 2/5
Tales Of The Wizard Of Oz: Free Trade [1961], 4:28
The Ch. 19 Short Answer Test will be Wednesday. There are ten Questions on the Test. There are no sample Test Prep questions.
Email HW to gmsmith@shanahan.org
1. Be sure to review Chapters 20-24 (we will have Tests on this material as well, TBA). Some students have asked to be tested as close as possible after covering the material.
2. Ch. 25
■ Put it in context. Illustrate U.S. International Trade in Goods and Services with the graph on this Foreign Trade Statistics page from the U.S. Census Bureau. This will give students an overview of the size of U.S. trade. The page is located at:
http://www.census.gov/indicator/www/ustrade.html.
In a paragraph, summarize the foreign trade data that is shown there.
3. Ch. 25 Questions and Problems, p. 663-664, #6-10.
4. As review for HW, typical questions that you may encounter on the actual AP Economics Macro Test are included daily:
Review Questions (Princeton):
a) A decrease in taxes
b) An increase in government spending
c) An increase in the discount rate
d) An increase in the required reserve ratio
e) The purchase of bonds
17. Which of the following statements would "supply side" economists disagree with?
a) Tax changes cause shifts in aggregate supply that work against shifts in aggregate demand, thus reducing the effect of the tax change on real GDP.
b) A tax cut is likely to increase aggregate supply by boosting saving, investment, and thus capital accumulation.
c) A tax increase is likely to decrease aggregate supply by decreasing after-tax wages and thus providing disincentives to work.
d) A tax cut is likely to increase aggregate supply by providing greater rewards for risk taking.
e) A decrease in tax rates does not necessarily result in a decrease in tax revenues.
18. Which of the following statements is correct in regard to the federal budget deficit and the federal debt?
a) When the debt is negative, the deficit decreases.
b) When the debt is positive, the deficit decreases.
c) The deficit is the accumulation of past debts.
d) When the deficit is negative, the debt decreases.
e) When the deficit is negative, the debt increases.
