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International Trade
U.S. 2002 Trade Informationexports: 1.0 trillion dollars 9.7 % of GDP
imports: 1.4 trillion dollars 13.7 % of GDP
Source: http://devdata.worldbank.org/external/CPProfile.asp?SelectedCountry=USA&CCODE=USA&CNAME=United+States&PTYPE=CP
When a country does not trade:
production possibilities = consumption possibilities.
This is not true when the country trades.
Example: Production Possibilities for the U.S. & Japan
Food and Computers
Production Possibilities for the U.S.
food computers
0 30
20 20
40 10
60 0
10 C cost 20 F
or 1C costs 2 F
Production Possibilities for the U.S.
food computers
0 30
20 20
40 10
60 0
10 C cost 20 F
or 1C costs 2 F
computers
food
Production Possibilities for the U.S.
food computers
0 30
20 20
40 10
60 0
10 C cost 20 F
or 1C costs 2 F
computers
food
60
45
30
15
0 15 30 45 60
Production Possibilities for the U.S.
food computers
0 30
20 20
40 10
60 0
10 C cost 20 F
or 1C costs 2 F
computers
food
60
45
30
15
0 15 30 45 60
Production Possibilities for Japan
food computers
0 45
10 30
20 15
30 0
15 C cost 10 F
or 1 C costs 2/3 F
Production Possibilities for Japan
food computers
0 45
10 30
20 15
30 0
15 C cost 10 F
or 1 C costs 2/3 F
computers
food
Production Possibilities for Japan
food computers
0 45
10 30
20 15
30 0
15 C cost 10 F
or 1 C costs 2/3 F
computers
food
60
45
30
15
0 15 30 45 60
Production Possibilities for Japan
food computers
0 45
10 30
20 15
30 0
15 C cost 10 F
or 1 C costs 2/3 F
computers
food
60
45
30
15
0 15 30 45 60
Trade Arrangement
Since 1 C costs 2 F in the U.S., and 1 C costs 2/3 F in Japan, 1 C will trade for between 2/3 F and 2 F.
Suppose they agree to trade 1C for 1 F.
Consumption Possibilities for the U.S.
computers
food
60
45
30
15
0 15 30 45 60
The consumption possibilities are now greater than the production possibilities.
consumption
production
Consumption Possibilities for Japan
computers
food
60
45
30
15
0 15 30 45 60
Again, theconsumption possibilities are greater than the production possibilities.
consumption
production
Natural Barriers to Trade
contracting costs negotiating costs transportation costs
Artificial Barriers to Trade
tariff: a tax on imported goods
quota: a limit on the quantity of a good that is imported
Free Trade
exchange of goods between countries without artificial barriers.
Benefits of Free Trade
Consumer Surplus
difference between the price paid and the amount the consumer is willing to pay.
P
Q
P*
the area under the demand curve and above the price
D
Producer Surplus difference between the amount the producer must receive
to be willing to provide the good and the price paid.
P
Q
P*
the area under the price and above the supply curve
S
Domestic Demand Curve (DD ): Demand for Cars by U.S. Consumers
quantity
price
DD
A
Domestic Supply Curve (SD ): Supply of Cars to U.S. Consumers by U.S. Producers
quantity
priceSD
DD
A
D
Without trade: price is OB and quantity is OI.
quantity
priceSD
DD
A
B
D
O
E
I
Without trade: consumer surplus is area ABE ...
quantity
priceSD
DD
A
B
D
O
E
I
... and producer surplus is area DBE.
quantity
priceSD
DD
A
B
D
O
E
I
Total Supply Curve (ST ): Supply of Cars to U.S. Consumers by All Producers
quantity
priceSD
DD
A
B
D
O
E
I
ST
With trade: price is OC and quantity purchased by U.S. consumers is OJ.
quantity
priceSD
DD
A
BC
D
O
E
I J
ST
G
The quantity sold by U.S. producers is OH and the quantity of imports is HJ.
quantity
priceSD
DD
A
BC
D
O
E
H I J
ST
GF
With trade: Consumer Surplus is area ACG
quantity
priceSD
DD
A
BC
D
O
E
H I J
ST
GF
Recall: Without trade, consumer surplus was area ABE.
quantity
priceSD
DD
A
BC
D
O
E
H I J
ST
GF
Consumers have gained area CBEG from trade.
Suppose we are viewing this issue from the perspective of the U.S. government.
Our concern is the welfare of U.S. consumers and U.S. producers (not foreign producers).
Domestic producer surplus is the area above the domestic supply curve and below the price.
With trade: (Domestic) Producer Surplus is area CDF
quantity
priceSD
DD
A
BC
D
O
E
H I J
ST
GF
Recall: Without trade, producer surplus was area DBE.
quantity
priceSD
DD
A
BC
D
O
E
H I J
ST
GF
Producers have lost area CBEF from trade.
So consumers have gained area CBEG and ...
quantity
priceSD
DD
A
BC
D
O
E
H I J
ST
GF
... producers have lost area CBEF.
quantity
priceSD
DD
A
BC
D
O
E
H I J
ST
GF
So for U.S. citizens, there is a net gain from trade of area EFG.
quantity
priceSD
DD
A
BC
D
O
E
H I J
ST
GF
Putting it all together:Relative to the no-trade situation,
when there is free trade,
the price paid by U.S. consumers is lower. the quantity purchased by U.S. consumers
is higher. there is a gain in consumer surplus. there is a loss of producer surplus. there is a net gain to U.S. citizens.
How do tariffs & quotas affect U.S. citizens?
Relative to the free trade situation, the price paid by U.S. consumers is higher. the quantity purchased by U.S. consumers
is lower. there is a loss of consumer surplus. there is a gain in producer surplus.
