Exam 17: International Trade

Imports of goods by high-income nations from low-income nations increase the demand for labour in low-income nations.Other things equal,increases in labour demand cause rises in wages and incomes.The problem according to some observers is that the benefits low-income countries derive from increased production-especially increased exports of agricultural commodities-accrue mainly to large corporations in those countries,some of which are owned by shareholders from high-income nations.Because workers in low-income countries have few employment options,and are not unionized,the large dominant sellers can supposedly keep an undeservedly large portion of the proceeds from added exports for themselves (in the form of profits)while simultaneously denying a fair share to their workers (by keeping wages low). To counter this purported problem,consumer organizations in some of the high-income countries have tried to bypass the usual distribution channels and buy imported goods directly from producers or producer cooperatives that agree to fair-trade standards.Such standards guarantee the producers higher-than-market prices if they agree to pay their workers higher-than-market wages and to abide by rules regarding working conditions and workplace safety.

For the United States,there will be domestic supply and demand and export supply and import demand for aluminum.The price and quantity of aluminum are determined by the intersection of the domestic demand and supply curves in a world without trade.In a world with trade,the export supply curve for the United States shows the amount of aluminum that American producers will export at each world price above the domestic equilibrium price.American exports will increase when the world price rises relative to the domestic price.The import demand curve for the United States shows the amount of aluminum that Americans will import at each world price below the domestic equilibrium price.American imports will increase when world prices fall relative to the domestic price. For Canada,there will be domestic supply and demand and export supply and import demand for aluminum.The description of these supply and demand curves is similar for those of the United States.The price and quantity of aluminum are determined by the intersection of the domestic demand and supply curves in a world without trade.In a world with trade,the export supply curve for Canada shows the amount of aluminum that the Canadian producers will export at each world price above the domestic equilibrium price.Canadian exports will increase when the world price rises relative to the domestic price.The import demand curve for Canada shows the amount of aluminum that Canadians will import at each world price below the domestic equilibrium price.Canadian imports will increase when world prices fall relative to the domestic price. The equilibrium world price and equilibrium world levels of exports and imports of aluminum can be determined with further supply and demand analysis.The export supply curves of the United States and Canada can be plotted on one graph.The import demand curves of both nations can be plotted on the same graph.In this two-nation model,equilibrium will be achieved where one country's import demand curve for aluminum intersects the other country's export supply curve.

If resources were as mobile as goods,they would flow across borders until cost conditions were equalized throughout the world and there would be no need for specialization and trade.However,it is clear that this is impossible.Even human resources are somewhat immobile and natural resources are not equally endowed in each nation.Therefore,cost conditions differ from nation to nation,and some nations can produce some things relatively more cheaply than others.This leads to specialization and exchange according to the principle of comparative advantage.It is the goods that are bought and sold across borders rather than the resources,and this enables countries to be compensated for the differences in the cost of production.