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2 Free Trade and Protectionism
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Unit 4.1 and 4.2 Free Trade and Protectionism
Abraham Lincoln was once advised to buy cheap iron rails from Britain to finish the
transcontinental railroad. He replied, "It seems to me that if we buy the rails from
England, then we've got the rails and they've got the money. But if we build the rails
here, we've got our rails and we've got our money."
To paraphrase: "If I buy meat from the butcher, then I get the meat and
he gets my money. But if I raise a cow in my backyard for three years
and slaughter it myself, then I've got the meat and I've got my money."
2. What is specialization?
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Unit 4.1 and 4.2 Free Trade and Protectionism
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Unit 4.1 and 4.2 Free Trade and Protectionism
Labor-intensive goods
-Examples:
-Where?
Land-intensive goods
-Examples:
-Where?
Capital-intensive goods
-Examples
-Where?
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Unit 4.1 and 4.2 Free Trade and Protectionism
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Unit 4.1 and 4.2 Free Trade and Protectionism
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Unit 4.1 and 4.2 Free Trade and Protectionism
goods
Televisions Financial services
country
China 50 40
UK 10 30
Illustrate the PPCs for the UK and China before and after trade.
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Unit 4.1 and 4.2 Free Trade and Protectionism
Financial services "cost" the UK less than they do China. TVs "cost" China less
than they do the UK. China should produce TVs, the UK financial services
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Unit 4.1 and 4.2 Free Trade and Protectionism
apples
apples
Two goods:
• Apples
• Cell phones
Absolute advantage?
• Apples:
13 12
cell phones cell phones
• Cell phones:
How much do apples "cost"? How much do cell phones "cost"
Comparative advantage?
• in the US? -> 1a = 1/3c • in the US? -> 1c = 3a
• Apples:
• in Korea? -> 1a = 1/2c • in Korea? -> 1c = 2a
• Cell phones:
Should the countries trade? Why or why not?
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Unit 4.1 and 4.2 Free Trade and Protectionism
24
apples
apples
13 19.5 12
cell phones cell phones
United States: Specialize in apples -> trade apples for cell phones with Korea. Korea should be
willing to trade 1 apple for anything up to, but not beyond, 1/2 cell phone. Before trade, 1 apple
could only be get America 1/3 cell phone. The US has gained from trade.
Korea: Specialize in cell phones -> trade cell phones for apples with the US. The US should be willing
to exchange up to three apples for one cell phone. Before trade, Korea could only get two apples for
each cell phone it gave up. Korea has gained from trade.
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Unit 4.1 and 4.2 Free Trade and Protectionism
20 A
Mexico Mexico 15 60
15
10 B
USA 30 90
20 30 60 90
Avocados
Suppose the US and Mexico had been producing at points A and B before trade:
-What was total output of soybeans? ______ Avocados? ______
Suppose the countries specialize and trade based on comparative advantage:
-What is the total output of soybeans? ______ Avocados? ______
-What are the "gains from trade"? ____________________________
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Unit 4.1 and 4.2 Free Trade and Protectionism
Discussion Questions:
How could free trade lead to a loss of jobs in one country and create new jobs
at the same time (in the SAME country)?
NCEE Workbook Activity 50: Economic Efficiency and Gains from Trade
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Unit 4.1 and 4.2 Free Trade and Protectionism
Is society as a whole better or worse off with free trade? How do you know?
Give one argument for free trade and one against, referencing the diagram
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Unit 4.1 and 4.2 Free Trade and Protectionism
Based on simple supply/demand analysis, there are winners and losers from free trade.
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Unit 4.1 and 4.2 Free Trade and Protectionism
Pd After trade:
• Market becomes perfectly competitive,
Pw Sworld which means domestic producers no longer
have ability to control price by increasing
or decreasing output. The world price is
Dd lower due to more competition from
overseas milk farmers.
Q1 Qe Q3 Q • Lower price prompts domestic milk
farmers to decrease Qs to Q1
Winners: Domestic consumers and foreign • Qd increases to Q3.
producers. Foreign household should benefit as • Since there is domestic shortage at Pw
well due to increased demand for exports, meaning imports will equal Q3-Q1.
higher AD and higher incomes. • Total welfare in this society increases
Losers: Domestic producers and their employees. from red area to the red and gray shaded
Forced to compete and sell milk at lower price. areas.
Must lower wages or lay off workers. Producer
surplus declines.
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Unit 4.1 and 4.2 Free Trade and Protectionism
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Unit 4.1 and 4.2 Free Trade and Protectionism
Administrative obstacles: "the red tape" that governments may erect when free trade
agreements limit the imposition of tariffs and quotas. May include overly burdensome
quality controls, safety regulations, living-wage and other workplace standards to be
met by foreign producers. If foreign producers cannot meet these standards, their
products are forbidden from being sold domestically. May include environmental,
health and safety standards.
Subsidies: Payments from the government to producers, for example farmers, in order
to reduce the costs of production. Meant to lower the price of domestic goods to
consumers, could have the effect of keeping foreign goods out of domestic market.
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Unit 4.1 and 4.2 Free Trade and Protectionism
Americans now pay more for their cars and have fewer to choose from.
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Unit 4.1 and 4.2 Free Trade and Protectionism
Explain two benefits (gains) which might arise from international trade.
(Total 10 marks)
Students might explain the benefits in terms of any two of the following:
• a more efficient allocation of resources
• the principle of absolute and comparative advantage
• enlargement of markets
• greater employment prospects
• possibility of economies of scale
• international competition and the overcoming of abuse of monopoly power
• greater choice for consumers.
• Some answers might be framed entirely in terms of comparative advantage and if this is done fully and well and at least two
distinct points are made, it should be possible to earn full marks.
Using an appropriate diagram, explain who gains and who loses from the
introduction of a tariff. (Total 10 marks)
• definition of a tariff
• diagrammatic representation of a tariff
• illustration of impact of tariff on the government and analysis
• illustration of impact of tariff on the consumer and analysis
• illustration of impact of tariff on the producer and analysis
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Unit 4.1 and 4.2 Free Trade and Protectionism
Before subsidy:
• domestic producers supplied Q1
• Demand was Q3 DWL
• country imported Q3 - Q1.
Ps
After subsidy: Subsidy
• Subsidy increases the price Pw Sworld
producers receive.
• Increases producer surplus by
blue area. Ddomestic
• costs taxpayers amount equal
to blue + black area.
Q2 Q
• Domestic output increases to Q20 Q1 Q3
• country imports only Q3 - Q2.
Black triangle represents DWL to society. Cost of subsidy exceeds benefits to society, therefore
there is a total loss of welfare.
Consumers will still pay Pw, so there's no gain nor loss of consumer surplus. But since their tax
dollars are being used to subsidize inefficient domestic producers, society as a whole is worse
off after the subsidy.
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Unit 4.1 and 4.2 Free Trade and Protectionism
Consumers buy fewer cars and pay a higher price. Purple and pink areas used to be
CS and are now PS. Blue are is now PS for foreign producers who are getting a
higher price for their cars.
Gray area is DWL since it used to be CS but is now lost welfare. This triangle
represents a net loss of world efficiency resulting from the restriction of free trade.
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Unit 4.1 and 4.2 Free Trade and Protectionism
Gov't rev.
Pw+t Sworld + tariff
Pw Sworld
DWL
Ddomestic
0 Q1 Q2 Q3 Q4 Q
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Unit 4.1 and 4.2 Free Trade and Protectionism
Sw/ subsidy
DWL
Ps
Sworld
Ddomestic
0 Q1 Q2 Q3 Q
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Unit 4.1 and 4.2 Free Trade and Protectionism
Sw/ quota
Pq
DWL
Pw Sworld
Qu
Ddomestic
0 Q1 Q2 Q3 Q4 Q
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Unit 4.1 and 4.2 Free Trade and Protectionism
foreign incomes?
domestic government?
Global allocative efficiency?
Is a tariff a regressive, progressive, or proportional tax? Who is affected more, rich or poor?
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Unit 4.1 and 4.2 Free Trade and Protectionism
Strategic reasons:
Which of these arguments for protectionism do you feel are most valid?
Discuss with a partner...
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Unit 4.1 and 4.2 Free Trade and Protectionism
Which of these arguments against protectionism do you feel are most valid?
Discuss with a partner...
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Unit 4.1 and 4.2 Free Trade and Protectionism
Find an article from the current press relating to a free trade agreement (FTA). Read
and discuss with your partners at your table. On a poster, identify the following points:
• What are the pros and cons of the Free Trade Agreement discussed in your article?
• What are the alleged benefits of the agreement being discussed?
• Who are the opponents of free trade and what are their arguments?
• Who are the supporters of free trade and what are their arguments?
Possible articles:
Korea, EU Look Forward to Progress in Free Trade Talks
Bush: New Free Trade Deals Will Strengthen U.S. Economy, Create Jobs
India-Sri Lanka Free Trade Agreement (FTA): Success and the road ahead
Rice Pushes for Free Trade Pacts Smart trade, the Clinton way
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Unit 4.1 and 4.2 Free Trade and Protectionism
Joseph Stiglitz on globalization More Lou Dobbs with guest David Sirota
http://www.youtube.com/watch?v=pdGC5Bemjxo
http://www.youtube.com/watch?v=wXxIqklh7P0&feature=related
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Unit 4.1 and 4.2 Free Trade and Protectionism
Protectionism…
• Benefits: Domestic producers may benefit b/c they receive a higher price for
their output. The federal government may gain through revenue from tariffs.
• Hurts: Consumers are harmed b/c they pay higher prices for goods
produced by the protected industry. Foreign producers are hurt b/c they are
not able to sell their as much of their output as they would be able to
otherwise, so their profits are reduced.
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Attachments
APMacroUnits56.pdf
APMacroUnits56﴾11795﴿.jnt