International Trade
Comparative Advantage
• Comparative Advantage: The situation in
which a country can produce a good at a
lower opportunity cost than another
country.
• Countries specialize in the production of
the good in which they have a comparative
advantage
Comparative Advantages
• After they have specialized in production, the
two countries must settle on the terms of trade.
• A country gains by specializing in producing and
trading the good in which it has a comparative
advantage
• It is individuals’ desire to earn a dollar, euro, or a
pound that determines the pattern of
international trade. The desire to earn a profit
determines what a country specializes in and
trades.
Q&A
• Suppose the United States can produce 120
units of X at an opportunity cost of 20 units of
Y, and Great Britain can produce 40 units of X
at an opportunity cost of 80 units of Y.
Identify favorable terms of trade for the two
countries.
• If a country can produce more of all goods
than any other country, would it benefit from
specializing and trading? Explain your
answer.
Trade Restrictions
• Specialization and international trade benefit
individuals in different countries. But this benefit
occurs on the net. Every person may not gain.
• Consumers’ Surplus = Maximum Buying Price –
the Price Paid.
• Producers’ Surplus = Price Received – Minimum
Selling Price
Consumers’ and Producers’
Surplus
Tariffs
• A Tariff is a tax on imports. The primary
effect of a tariff is to raise the price of
imported goods to the domestic consumer.
• The effects of the tariff are a decrease in
consumers’ surplus, an increase in
producers’ surplus, and tariff revenues for
government.
Tariffs and Consumer’ surplus, and
producer’s surplus
• Consumers receive more consumers’
surplus when tariffs do not exist and less
when they do.
• Producers receive less producers’ surplus
when tariffs do not exist and more when
they do exist.
The Effects of a Tariff
Quotas
• A Quota is a legal limit on the amount of a good
that may be imported.
• Because the loss to consumers is greater than
the increase in producers’ surplus plus the gain
to importers, there is a net loss as a result of
the quota.
Quotas, Consumer’s surplus, and
Producer’s surplus
• A quota reduces the supply of a good and
raises the price of imported goods to domestic
consumers.
• The effects of a quota are a decrease in
consumers’ surplus, an increase in producers’
surplus, and an increase in total revenue to the
importers who sell the allowed number of
imported units.
The Effects of a Quota
Why Nations Restrict Trade
• National Defense Argument: Certain
industries should remain based in our
country, especially if they manufacture items
vital to our defense.
• Infant Industry Argument: New industries
must be protected from older, established
foreign competitors until they are mature
enough to compete. However, removing that
protection is almost impossible.
Why Nations Restrict Trade
(cont.)
• Antidumping Argument: Dumping is the sale of
goods abroad at a price below their cost and below
the price charged in the domestic market. A foreign
competitor could wipe out a market by dumping their
products in America.
• Foreign – Export – Subsidies Argument: Some
governments subsidize the firms that export goods.
Why Nations Restrict Trade
(cont.II)
• Low Foreign Wages Argument: American producers
can’t compete with foreign producers because
American producers pay high wages to their workers
and foreign firms pay low wages. A country’s low
wage advantage may be offset by its productivity
disadvantage. High wages means High productivity.
Low wages mean low productivity.
• Saving Domestic Jobs Argument: This argument is
actually most of the previous arguments but in
disguise.
What Price Jobs?
“Voluntary” Export
Restraint (VER) is an
agreement between
two countries in which
the exporting country
“voluntarily” agrees to
limit its exports to the
importing country.
World Trade Organization
• “[The WTO’s] overriding objective is to help trade
flow smoothly, freely, fairly, and predictably.”
• It does these things by administering trade
agreements, acting as a forum for trade
negotiation, settling trade disputes, reviewing
national trade policies, assisting developing
countries in trade policy issues, and cooperating
with other international organizations.
• The WTO, in theory, is supposed to lead to freer
international trade, and there is some evidence
that is has done just this.
• Critics often say that it has achieved this objective
at some cost to a nation’s sovereignty.