Chapter 18 (16 Micro)
Gaining From International Trade
OUTLINE
I. The Trade Sector of the United States
A. The size of the trade sector has grown rapidly in recent years.
B. Both exports and imports were approximately 10 percent of the economy in 1980. In
2012, exports accounted for 14 percent of GDP output, while imports summed to 18
percent.
C. Canada, China, and Mexico are the leading trading partners of the United States.
II. Gains from Specialization and Trade
A. Law of comparative advantage: A group of individuals, regions, or nations can
produce a larger joint output if each specializes in the production of the goods for
which it is a low opportunity cost producer and trades for those goods for which it is a
high opportunity cost producer.
2. Trade permits each country to use more of its resources to produce those goods that
it can produce at a relatively low cost.
3. With trade, it will be possible for the trading partners to consume a bundle of
goods that it would be impossible for them to produce domestically.
B. As long as relative production costs of the two goods differ between two countries
for example, United States and Japan gains from trade will be possible.
C. In addition to the gains derived from specialization in areas of comparative advantage,
international trade leads to gains from:
1. Economies of Scale: International trade allows both domestic producers and
2. More Competitive Markets: International trade promotes competition in domestic
markets and allows consumers to purchase a wide variety of goods at economical
prices.
III. Supply, Demand, and International Trade
A. Impact of trade on markets where U.S. producers have a comparative advantage.
B. Impact of trade in markets where foreigners have a comparative advantage.
C. Summary: Supply, Demand, and Gains from Trade
1. International trade and specialization result in lower prices (and higher domestic
2. Trade permits the residents of each nation to concentrate on the things they do best
(produce at a low cost), while trading for those they do least well.
1. Import restrictions, such as tariffs and quotas, reduce foreign supply to the
2. Jobs protected by import restrictions are offset by jobs destroyed in export
industries.
V. Why Do Nations Adopt Trade Restrictions?
A. National Defense Argument
B. Infant Industry Argument
C. Dumping: The sale of goods abroad at a price below their cost (and below their price
in the domestic market of the exporting nation)
2. When considering the merits of anti-dumping restrictions, it is important to
remember that (a) firms with large inventories may find it in their interest to offer
domestic purchasers.
D. Special Interests and Trade Restrictions
1. Trade restrictions provide highly visible, concentrated benefits for a small group of
2. Politicians have a strong incentive to favor special interest issues, even if they
conflict with economic efficiency.
VI. Trade Barriers and Popular Trade Fallacies
A. Trade Fallacy 1: Trade restrictions that limit imports save jobs and expand
employment.
1.
mean more Americans working in areas where we do not have a comparative
advantage.
B. Trade Fallacy 2: Free trade with low-wage countries like Mexico and China will
reduce the wages of Americans.
VII. The Changing Nature of Global Trade
A. The growth of the trade sector has been propelled by technological advancements,
Chapter 18 (16 Micro)/Gaining From International Trade 165
OBJECTIVES
This chapter focuses on the microeconomic aspects of international trade. The law of comparative
advantage and the concept of gaining from specialization and trade are central to the analysis. These
tools were introduced in Chapter 2. Thus, instructors may want to have their students review that
material prior to their reading of this chapter.
After analyzing the impact of international trade on export and import markets, various trade
restrictions are discussed. The impact of trade restrictions on aggregate output is considered. Tariff
legislation is analyzed. While there are a few partially valid arguments for trade restrictions,
protectionist legislation for most industries is based on fallacious reasoning (remember the
secondary effects) and the special-interest effect. The text discusses both the economic and political
consequences of protectionist policies.
IMPORTANT POINTS AND TEACHING SUGGESTIONS
1. Exhibit 1 indicates the size of trade sector as a share of the economy in the United States rose
2. It is important that students see the link between exports and imports. Exports provide the
purchasing power (foreign currencies) with which U.S. consumers purchase foreign goods,
3. Students have trouble distinguishing between absolute and comparative advantage. Numerical
examples help to illustrate this distinction. Exhibits 4 and 5 use a numerical example to
4. Exhibits 6 and 7 illustrate how trade influences domestic markets. Emphasize that when the
United States has a comparative advantage in production, domestic producers will be able to
compete effectively in the international market. Trade will permit the U.S. producers to expand
5. Tariffs and quotas nearly always pit the welfare of well-organized, concentrated, industrial and
labor interests of a protected industry against the unorganized consumer. Thus, the special
6. The argument that trade restrictions save jobs fails to consider the secondary effects. Although
7. Many laypersons believe that the United States cannot compete in international markets
because wage rates are higher in the United States than in most other countries. Of course, if
8. An interesting classroom application for this chapter is to ask students whether grades reflect
absolute or comparative advantages in the classroom. Your grade in a given class represents
10. It is helpful to go back to the earlier circular flow diagram to show the linkage between exports
11. Since the logic of the gains from trade to individuals is the same as that for international trade,
one helpful way to frame the issues of import restrictions is to ask when it would be in an
12. Game 1 helps students understand the debate regarding free trade and protectionism.
Chapter 18 (16 Micro)/Gaining From International Trade 167
GAMES
1. Free Trade or Protection?
Type: In-Class Assignment
Topics: effects of protectionism, free trade
Textbook: Chapter 17 Gaining from International Trade
Materials Needed: none
Time: 60 minutes
Class limitations: works in any size class
Purpose
This assignment leads the students through several trade issues. Many students, including those
who can make an economic argument for free trade, have an emotional attachment to
protectionism. This exercise examines the rationale for protecting jobs and looks at the direct and
indirect costs.
Instructions
Ask the class to answer the following questions. Give them time to write an answer to a question,
then discuss their answers before moving to the next question.
Question 4 is the hardest for students to answer; some additional explanation can help. If consumers
pay a total of $100,000 extra to save 100 U.S. jobs, then the cost of saving a job is $1000.
1. Which to do you favor, free trade or protection? Explain why.
2. Assume you are voting on a request before the U.S. International Trade Commission to raise
the tariff on imports of rubber thread. Rubber thread is made from latex and is a relatively
small industry. It is used in the manufacture of elastic in items like socks, underwear, and
bungee cords. Increasing the tariff would allow the U.S. producers to avoid layoffs and to
invest in technology.
Would you vote for the tariff increase, or against it?
3. More generally, what are the benefits of keeping a job in the United States?
4. The costs of protectionism are paid by consumers in the form of higher prices. The obvious
extra should consumers pay to keep a job in the United States? (Express this figure in
dollars/per job.)
Common answers and points for discussion
1. Which to do you favor, free trade or protection? Explain why.
2. Assume you are voting on a request before the U.S. International Trade Commission to raise
168 Chapter 18 (16 Micro)/Gaining From International Trade
Would you vote for the tariff increase, or against it?
3. More generally, what are the benefits of keeping a job in the United States?
4. The costs of protectionism are paid by consumers in the form of higher prices. The obvious
extra should consumers pay to keep a job in the United States? (Express this figure in
dollars/per job.)
few students will take this stand.
HINTS FOR ANSWERING CRITICAL ANALYSIS QUESTIONS
7. The high tariff on imported steel would raise the price of steel and thus the cost of producing
13. Challenge students to think about the following questions: (1) Are we harmed by an increase
in imports? (2) Would we be better off if stereo equipment, automobiles, clothing, and other
14. The quota reduces the supply of sugar to the domestic market and drives up the domestic
price of sugar. Domestic producers benefit from the higher prices at the expense of domestic
consumers (see Exhibit 9). Studies indicate that the quota expanded the gross income of the