Why Trade? Disclaimer: The views expressed are those

Why Trade? Disclaimer: The views expressed are those

Why Trade? Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System. Gains from Trade Distribute bags and rate satisfaction Divide into groups of three, trade and rate satisfaction after trade Trade with everyone in the room and rate satisfaction after trade Two Concepts Trade Occurs when parties expect to gain

Trade among individuals or organizations within a nation or in different nations Specialization Producers specialize in what they can produce at the lowest cost Necessitates trade Production and (total) consumption increase Specialization and Trade Absolute Advantage The natural advantages which one country has over another in producing particular

commodities are sometimes so great that it is acknowledged by all the world to be in vain to struggle with them. Adam Smith in Wealth of Nations Book IV, Chapter 2 Comparative Advantage David Ricardo showed that nations could benefit from trade even without an absolute advantage. Comparative advantage refers to a countrys ability to produce a good at a lower opportunity cost than another country.

Opportunity Costs An economic way of thinking Costs are not monetary The cost of getting something is really the value of the next best alternative that is not chosen Think about the choices you make Nap or workout on Sunday afternoon Beach or mountains or city for vacation Differing Opportunity Costs Investments in technology Relative supply of key inputs Land (natural resources)

Labor (both skilled and unskilled) Capital Government services and regulations Imagine two islands Both produce fish and coconuts Fishing requires boats (capital) and labor Coconut harvest requires trees (land) and labor Different amounts of resources One island has many trees and few boats Other island has many boats, but few

trees Coconut Island Resources lots of coconut trees and only a few boats Coconut Industry thriving coconut harvests with lots of competition Fishing Industry very little fishing and almost no competition Food supply abundant coconuts and scarce fish Consumers cheap coconuts and expensive fish Fish Island Resources lots of boat and only a few trees

Coconut Industry small harvests and no competition Fishing Industry abundant catches and intense competition Food supply abundant fish and scarce coconuts Consumers cheap fish and expensive coconuts New connections The Impact of Trade Who cares about the price of coconuts? People who eat coconuts People who own trees (land) People who climb trees (labor)

Who cares about the price of fish? People who eat fish People who own boats (capital) People who sail and fish (labor) Who Could Object? Who Could Object? Barriers to Trade Tariff Tax on imported goods or services

Reasons for tariffs Raise tax revenues Reduce consumption of the imported good or service Effect Price of import rises, cheaper domestic goods become more attractive Percent of Federal Budget from Tariffs 100.00% 90.00% 80.00% 70.00% 60.00%

50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 17 92 18 00

18 10 18 20 18 30 18

40 18 50 18 60 18 64

18 70 18 80 18 90 19

10 19 15 19 17 19 20

19 28 19 35 19 42 19

46 19 50 19 55 19 65

19 75 19 85 19 95 20

05 Percent of Federal Budget from Tariffs 100.00% 90.00% 80.00% 70.00% 60.00% 50.00%

40.00% 30.00% 20.00% 10.00% 0.00% 17 9 2 7 95 800 805 81 0 8 15 8 20 8 25 830 8 35 8 40 8 45 850 855 8 60 8 63 864 865 8 70 8 75 880 885 8 90 9 00 910 913 9 15 9 16 917 918 1

1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 1 1 1 1 1 1 1 1 1 1 1 1 1

Types of Federal Revenue as a percentage of total receipts 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Tariff Income Tax Payroll Tax Other Alexander Hamilton Proposed extensive tariffs to provide revenue and protect American manufacturers (rooted in mercantilism) Three tariff acts

1789 1790 1792 Andrew Jackson Tariff Act of 1828 (Tariff of Abominations) Nullification Crisis Progressive Ideal Replace tariffs with income tax 1913 watershed year Underwood Tariff Act lowered tariffs Federal income tax created

Ongoing FordneyMcUmber Tariff (1922) SmootHawley (1933) Quota Limits the amount of an imported good allowed into the country Supply is decreased and price increases Voluntary Export Restrictions (VERs) are similar Export Subsidy Government financial assistance to a firm that allows a firm to sell its product at a reduced price

Benefits and harms Consumers (both at home and abroad) benefit from lower prices Foreign producers are harmed because of lower world prices Taxpayers in the producing country pay the subsidy Product Standards A type of hidden trade barrier Types of standards Product safety Content Packaging

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