Understanding International Trade: Advantages, Tradeoffs, and Terminology - Prof. Ml Walde, Study notes of Agricultural engineering

Download Understanding International Trade: Advantages, Tradeoffs, and Terminology - Prof. Ml Walde and more Study notes Agricultural engineering in PDF only on Docsity! 1 Lecture 10: International Markets I. Why trade with other countries? Same reasons people trade with each other - because it's beneficial to do so. But two specific reasons when looking at international trade 1. Absolute Advantage: Consider countries A and B. A can make brooms better and cheaper than B can make brooms, whereas B can pump oil better and cheaper than A can pump oil. So A trades brooms to B for oil. 2. Comparative Advantage: A can both make brooms and pump oil better than can B. However, between broom making and pumping oil, A does brooms the best. So here it still makes sense for A to concentrate on making brooms and trade brooms to B for oil. Example in class: Your favorite professional athlete, who is in excellent condition, likely doesn't mow the lawn at his/her home, even though he or she could do it better than anyone else. But the athlete hires someone to mow the lawn because the time the athlete would use for lawn mowing could be better spent practicing, considering investments, etc. This is again the idea of opportunity cost. II. Tradeoffs in foreign trade 1. When trade with a foreign country does occur, and domestic consumers switch from purchasing from domestic companies to purchasing from foreign companies, domestic investors and workers in those domestic companies lose. 2. Presumably domestic consumers save money by buying from foreign companies. So one approach is to tax away some of those benefits, or gains, and use the proceeds to compensate or assist the domestic workers who lose. Example: As a result of being able to purchase lower priced foreign made clothing, it's estimated US consumers are saving $20 billion annually (that is, they are spending $20 billion less on clothes than they would have if they couldn't purchase foreign made clothing. If they paid a 5% special tax on these purchases, they would still be left with a gain of $10 billion annually, but the other $10 billion could be spent assisting the displaced textile and apparel workers. So this is a "win-win". 3. Issue of whether foreign workers are paid much less than US workers, and whether this makes it impossible for US workers to compete. 2 a) Are foreign workers "unfairly" paid less? Answer: Must put their pay in context of their country's cost of living. For example, pay of $1 per day in some foreign country might be enough for a reasonable standard of living, since prices there are much lower than in the U.S. b) Can higher paid U.S. workers compete with lower paid foreign workers? Answer: Yes, if the productivity (output per hour) of US workers is sufficiently higher. What matter is {worker output per hr./wage per hr.} Example: US wage: $20 per hour US productivity: 100 computer chips per hour Labor cost per chip: 5 chips per $1 or $0.20 per watch Foreign wage: $1 per hour Foreign productivity: 4 computer chips per hour Labor cost per chip: 4 chips per $1 or $0.25 per watch Conclusion: US worker is actually cheaper III. Trade Terminology (from the perspective of the U.S.) 1. Exports: sales of goods and services from the U.S. to other countries Imports: purchases of goods and services from other countries by the U.S. 2. Current Account Balance: trade in products and services Trade Deficit: US buys more products and services from foreign countries than it sells to foreign countries Trade Surplus: US sells more products and services to foreign countries than it buys from foreign countries 3. Capital Account Balance: comparison of investment flows Capital Deficit: US invests more in foreign countries than foreign countries invest in the US Capital Surplus: Foreign countries invest more in the US than US invests in foreign countries 4. Interesting fact: The balance on the current account will equal the balance on the capital account, but of opposite sign. That is, if there is a trade deficit, there will be a capital surplus of the same size. Or, if there is a trade surplus, there will be a capital deficit of the same size. What's going on: If US has a trade deficit, foreigners are accumulating US dollars, and those dollars are used to purchase US investments (assets).