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Macroeconomics, 9th Canadian Edition
Macroeconomics, 9/e
Campbell R. McConnell, University of Nebraska, Lincoln
Stanley L. Brue, Pacific Lutheran University
Thomas P. Barbiero, Ryerson University
The Gains from International Trade

Chapter Highlights

CHAPTER 17
  1. International trade is important to most nations, including Canada. Since 1971 our exports and imports have almost doubled as a percentage of GDP. Our major trading partner is the United States. Other major trading nations are Germany, Japan, the Western European nations, and the newly industrialized Asia tigers (Hong Kong, Singapore, South Korea, and Taiwan).
  2. World trade is based on two considerations: the uneven distribution of economic resources among nations, and the fact that efficient production of various goods requires particular techniques or combinations of resources.
  3. Mutually advantageous specialization and trade are possible between any two nations if they have different opportunity cost ratios for any two products. By specializing based on comparative advantage, nations can obtain larger real incomes with fixed amounts of resources. The terms of trade determine how this increase in world output is shared by the trading nations. Increasing (rather than constant) costs limits specialization and trade.
  4. A nation's export supply curve shows the quantity of product it will export at world prices that exceed the domestic price—the price in a closed, no-international-trade economy. Its import demand curve reveals the quantity of a product it will import at world prices below the domestic price. In a two-nation model, the equilibrium world price and the equilibrium quantities of exports and imports occur where one nation's import supply curve intersects the other nation's export demand curve.
  5. Trade barriers take the form of protective tariffs, quotas, non-tariff barriers, and "voluntary" export restrictions. Supply and demand analysis reveals that protective tariffs and quotas increase the prices and reduce the quantities demanded of affected goods. Sales by foreign exporters diminish; domestic producers, however, enjoy higher prices and enlarged sales. Tariffs and quotas promote a less efficient allocation of domestic and world resources.
  6. The strongest arguments for protection are the infant-industry and military self-sufficiency arguments. Most of the other arguments for protection are half-truths, emotional appeals, or fallacies that emphasize the immediate effects of trade barriers while ignoring long-run consequences. Numerous historical examples suggest that free trade promotes economic growth; protectionism does not.
  7. In 2000 the World Trade Organization (WTO) consisted of 138 member nations. It oversees trade agreements among the nations, resolves disputes over the rules, and periodically meets to discuss and negotiate further trade liberalization. Recently, the WTO has become a focus of protests by labour groups, environmental groups, socialists, and anarchists. Most economists believe that trade liberalization is too important to be tied to other political and economic causes, which should be pursued independently of trade rules.




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