Chapter 18 Trade Policy.ppt

Chapter 18: Trade Policy This chapter covers Trade Policy -- measures to alter International Trade: exports (X), imports (M), and net exports, or the Balance of Trade (X-M). To some extent, trade policy is used to stabilize the economy (changes in net exports shift the AD curve). Why Do Countries Trade? More conceptual issue -- using trade to make world resources be allocated more efficiently. People of different countries trade because they both stand to benefit from the deal. Absolute Advantage Absolute Advantage -- each country has an advantage in producing one good. Therefore, they produce a surplus of the advantaged good, and trade for the “other good”. Intuitive but overly restrictive. The Theorem of Comparative Advantage Theorem of Comparative Advantage -- Consider the different economies of two nations. Then there exists an efficient trade agreement that will benefit both nations. This holds even if one nation has an absolute advantage in all goods. The Production Possibility Curve The Production Possibility Curve -- a graph of possible outputs of two different goods for a country given fixed inputs which are used efficiently. Common example -- military goods (“guns”) versus non-military goods (“butter”). The Production Possibility Curve, Economic Situations Points on the curve -- efficient use of resources. Different points reflect emphases toward military or non-military goods. Points inside the curve -- inefficient use of resources. Points outside the curve -- unattainable production points given current resources. Ways to Attain “Unattainable Points” Shift production possibility curve outward -- more resources, higher labor productivity. Trade with other countries -- increases consumption possibilities without changing production possibilities. Comparative Advantage at work. Comparative Advantage -- Promote Free Trade Implication of Theorem of Comparative Advantage -- promote Free Trade, international trade with as few barriers to trade as