CHAPTER OUTLINE

1. Explain how markets work with internationaltrade.

A. InternationalTrade Today

B.  WhatDrives International Trade?

C. Whythe United States Imports T-shirts

D. Whythe United States Exports Airplanes

2.  Identify the gains from international tradeand its winners and losers.

A. Gainsand Losses from Imports

B.  Gainsand Losses from Exports

 

n What’s New in this Edition?

Chapter 9 is updated with new data toreflect changes in international trade since the fifth edition.

n Where We Are

Chapter 9 brings us to the midpoint inour study of the influence of government action upon markets. We also learnsome history behind the role government plays in international trade, thefactors that influence trade patterns, who gains and who loses frominternational trade, and examine trade’s political side.

n Where We’ve Been

We’ve set up supply and demand analysis,comparative advantage, consumer surplus, producer surplus, and deadweight lossto understand the impact of trade on domestic markets.

n Where We’re Going

Chapters 10 and11 will analyze externalities, public goods and common resources to understandmarket failures and further our study of the interaction of government andmarkets.

IN THECLASSROOM

n  ClassTime Needed

This material can take more time thanexpected because students frequently resist the notion that protectionism isinefficient. Consequently at least two or three class sessions should beplanned, so as to leave plenty of time for discussion.

           Anestimate of the time per checkpoint is:

·            9.1 How Global Markets Work—20minutes to 25 minutes

·            9.2 Winners, Losers, and NetGains from Trade—40 minutes to 60 minutes

·            9.3 International TradeRestrictions—20 minutes to 25 minutes

·            9.4 The Case AgainstProtection—45 minutes to 50 minutes

Classroom Activity: Ask your students tocheck the country of origin label on the items they purchase in an averageweek, and calculate the percentage of their expenditure taken up bynon-American goods. If possible, ask them to compare the price of non-U.S. madearticles to their imported counterparts. Which is higher? What motivates theirpurchasing decisions? Are they willing or able to change their buying habits toinclude more domestic goods?

Classroom Activity: Have students try tofind a current news article that ignores or uses incorrectly the ideas behindcomparative advantage. Examples abound of misguided reports regardingoffshoring, outsourcing, and trying to convince people to “buy domestic.” Onepossibility is to ask students to bring the articles to class for discussion orhave them email you the articles ahead of time – then pick a couple and talkabout the issues underlying the article. Alternatively, have students write aone to two sentence summary of how the article ignores the potential gains fromtrade. This can help students solidify for themselves the idea that tradeprovides benefits, although these benefits may accrue unevenly. Don’t be afraidto spend more time on this issue as the benefits from trade is a key idea forstudents to grasp. Alternatively, pick a current trade argument in the news asthe focus of discussion. Put the keys facts on the board or overhead and givestudents a chance to figure out who benefits and who loses from the restrictionin trade. You might want to divide students into groups and ask some groups tocome up with the benefits and others to come up with the costs. Then allow thestudents to present their arguments. Depending on where your school is, you mayget strong arguments regarding protecting family farms or protectingmanufacturing jobs. Be sensitive and take your students arguments seriously assome will have been affected directly by offshoring/outsourcing. But also pointout that the loss of jobs may be due to a downturn in the U.S. economy and notto jobs moving out of the country. Try to get the students to convince eachother that although there may be people in an economy who are adversely affectedby trade, there are net gains as the benefits from trade outweigh the costs.

CHAPTERLECTURE

n 8.1       How Global Markets Work

International Trade Today

• Imports are the goods and     services that we buy from people in other countries. Exports are the goods and     services that we sell to people in other countries.

·        The U.S. is the world’s largestinternational trader. In 2009, total exports were about 11 percent of totalU.S. production and total imports were about 13 percent of total U.S.expenditure.

What Drives International Trade?

The fundamental force thatgenerates international trade is comparative advantage. A country has a comparativeadvantage in producing a good if it can produce that good at a loweropportunity cost than any other country.

·        Thefigure shows the market for airplanes in the United States. The world price ofa plane, $80 million, exceeds the U.S. price, $60 million, which means that theUnited States has a comparative advantage in producing airplanes.

·        Withno trade, the equilibrium price is $60 million per plane and 300 planes are produced.

·        Whenthe United States trades with the world, the supply curve shows that it willproduce 400 planes. Of these 400 planes, the demand curve shows that 200 will bepurchased in the United States. The remaining planes will be exported toforeigners.

·        Thenumber of planes produced in the United States increases but the number ofplanes consumed in the United States decreases.

·        Ifthe world price of a good or service is lessthan the U.S. price, the United States does nothave a comparative advantage in producing the good or service and so it willimport the good or service from abroad. The amount of the good or serviceproduced in the United States decreases but the number consumed in the UnitedStates increases.

n 8.2       Winners, Losers, and Net Gains from Trade

Gains and Losses from Imports

Thegains and losses from imports are calculated by examining their effect onconsumer surplus, producer surplus, and total surplus.

·        Winnerssee their surplus increase, while losers see their surplus decrease.

·        The figure shows the market forpairs of pants in the United States. The world price of a pair of pants is lessthan the U.S. price, so the United States imports pants 200 million pairs ofpants.

·        Consumersurplus increases and equals the sum of areas C + B + D. Of this amount, area Bis lost by producers and gained by consumers. Area D is newly gained surplus resulting from the trade.

·        Producersurplus decreases and equals area A. Withouttrade, producer surplus would be the sum of areas A + B.

·        Becausethe total surplus increases by the amount of area D, the United States is better off with trade.

Gains and Losses from Exports

Thegains and losses from exports are likewise calculated by examining their effecton consumer surplus, producer surplus, and total surplus.

·        The figure shows the market forairplanes in the United States. The world price of an airplane exceeds the U.S.price, so the United States exports pants 200 airplanes.

·        Producersurplus increases and equals the sum of areas C + B + D. Of this amount, area Bis lost by consumers and gained by producers. Area D is newly gained surplus resulting from the trade.

·        Consumersurplus decreases and equals area A. Withouttrade, consumer surplus would be the sum of areas A + B.

·        Becausethe total surplus increases by the amount of area D, the United States is better off with trade.