33
International Trade and
Comparative Advantage
No nation was ever ruined by trade.
BENJAMIN FRANKLIN
Contents
● Why Trade?
● International versus Intranational Trade
● The Law of Comparative Advantage
● Supply, Demand, and Pricing in World
Trade
● Tariffs, Quotas, and Other Interferences
with Trade
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Contents (continued)
● Why Inhibit Trade?
● Other Arguments for Protection
● Can Cheap Imports Hurt a Country?
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
33-1 Labor Costs in
Industrialized Countries
TABLE
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Why Trade?
● Reasons countries benefit from foreign trade
♦ They can import resources they lack at home.
♦ They can import goods for which they are a
relatively inefficient producer.
♦ Specialization sometimes permits economies of
large-scale production.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Why Trade?
● Mutual Gains from Trade
♦ When trade is voluntary:
■Both sides must expect to gain from it
■Otherwise, they would not trade
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
International versus
Intranational Trade
● International and intranational trade are
similar in many respects.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
International versus
Intranational Trade
● Why international trade is studied
separately:
♦ Countries are governed by separate
governments
♦ International trade involves the exchange of
national currencies
♦ Labor and capital are less mobile
internationally than they typically are within a
country
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Law of Comparative
Advantage
● One country is said to have an absolute
advantage over another in the production of
a particular good if it can produce that good
using smaller quantities of resources than
can the other country.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Law of Comparative
Advantage
● One country is said to have a comparative
advantage over another in the production of
a particular good if it produces that good
less inefficiently than the other country.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Law of Comparative
Advantage
● The law of comparative advantage applies
even if one country is at an absolute
disadvantage relative to another country in
the production of every good.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Law of Comparative
Advantage
● Both countries gain from trade even if one
of them is more efficient than the other in
producing everything.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Law of Comparative
Advantage
● The Arithmetic of Comparative Advantage
♦ When countries differ in the relative efficiency
with which they produce different goods:
■Both world output and the welfare of each country
can be increased if:
● Each country specializes in producing the goods for
which it has a relative advantage;
● And then trades with the other.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
33-2 Alternative Outputs
from One Year of Labor Input
TABLE
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
33-3 Example of the
Gains from Trade
TABLE
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
The Law of Comparative
Advantage
● The Graphics of Comparative Advantage
♦ Production possibilities frontiers for two
countries can show:
■Different opportunity costs
■The potential gains from trade
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
33-1 Per-Capita PPFs for
Two Countries
FIGURE
60
U
Television Sets
(millions)
50
J
40
U.S. production
possibilities frontier
30
Japanese
production
possibilities
frontier
20
10
N
0
10
S
20
30
40
50
60
Computers
(millions)
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
FIGURE
33-2 The Gains from
Trade
90
90
80
80
70
70
60
50
J
40
Japanese consumption
possibilities
30
Japanese production
possibilities
20
10
Television Sets
100
Television Sets
100
A
U.S. consumption
possibilities
60
U
50
40
30
U.S. production
possibilities
20
10
N
0
10
P
20
S
30
40
50
60
0
10
20
30
40
50
60
Computers
Computers
(a) Japan
(b) United States
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
?
Comparative Advantage:
“Cheap Foreign Labor”
● A country can benefit from trade, even if
wages in the other country are considerably
lower than its own wages.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Supply, Demand, and Pricing
in World Trade
● In a two-country supply-demand model
without trade restrictions:
♦ The price of a good must be the same in both
countries
♦ The quantity of a good exported from one
country must equal the quantity imported by
the other
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
33-3 Supply-Demand in
the International Wheat Trade
Exporting
country’s
demand
$3.25
2.50
Exporting
country’s
supply
E
F
A
B
Exports
Price of Wheat per Bushel
Price of Wheat per Bushel
FIGURE
G
H
C
D
Imports
Importing
country’s
supply
0
Quantity of Wheat
(a) Exporting Country
0
Importing
country’s
demand
Quantity of Wheat
(b) Importing Country
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Tariffs, Quotas, and Other
Interferences with Trade
● Countries can reduce imports by setting
tariffs or quotas.
● They can promote exports by subsidizing
export goods.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Tariffs, Quotas, and Other
Interferences with Trade
● Tariff = tax on imports
● Quota = legal limit on the amount of a
good that may be imported
● Export subsidy = government payment to
an exporter
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Tariffs, Quotas, and Other
Interferences with Trade
● How Tariffs and Quotas Work
♦ Both tariffs and quotas 
■ price of imports
■ quantity of imports
♦ Any restriction of imports that is accomplished
by a quota normally can also be accomplished
by a tariff
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
33-4 Quotas and Tariffs
in International Trade
Exporting
country’s
supply
Exporting
country’s
demand
$2.50
2.00
0
A
B
R
S
80 85
115 125
Quantity of Wheat
(a) Exporting Country
Price of Wheat per Bushel
Price of Wheat per Bushel
FIGURE
Importing
country’s
demand
Importing
country’s
supply
Q
T
$3.25
2.50
0
C
D
50 57.5
87.5 95
Quantity of Wheat
(b) Importing Country
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Tariffs, Quotas, and Other
Interferences with Trade
● Tariffs versus Quotas
♦ When imports are to be reduced, tariffs are
generally preferable to quotas because:
■Tariffs generate income for the government
■Unlike quotas, tariffs offer no special benefits to
inefficient exporters
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Why Inhibit Trade?
● Reasons why countries may restrict trade:
♦ Gain a price advantage
♦ Protect particular industries
♦ National defense and other non-economic
reasons
♦ Infant-industry argument
♦ Strategic trade policy
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Why Inhibit Trade?
● But retaliation may eliminate their
advantage and make all countries worse off.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
33-4 Estimated Costs of
Protectionism to Consumers
TABLE
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
How Popular Is Protectionism?
Protectionists
Free traders
56%
Percentage
47%
42%
37%
World
United States
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Can Cheap Imports Hurt a
Country?
● Dumping = selling goods in a foreign
market at lower prices than those charged in
the home market
● Cheap imports:
♦ Benefit consumers
♦ Hurt some domestic businesses and their
workers
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Can Cheap Imports Hurt a
Country?
● Those who are hurt by cheap imports may
fight to prevent their losses.
● Politics often leads to the adoption of
protectionist measures that would be
rejected on strictly economic terms.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
?
A Last Look at the “Cheap
Foreign Labor” Argument
● Labor is cheap in countries where
productivity is low.
● Labor is expensive in countries like the
United States where labor productivity is
high.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
?
A Last Look at the “Cheap
Foreign Labor” Argument
● Under most circumstances, international
trade enhances our standard of living.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.