Absolute and Comparative
Advantage
Chevalier
Spring 2015
Warm-Up #14: Review Notes…
• List one economic cost and one social
cost of economic instability. What are
the three stabilization policies used to
stabilize economic volatility? Explain
the purpose of each.
The Key to Trade
• Specialization is the key to trade
• How do you know what a country
specializes in? Where do you look?
• You look at its EXPORTS- the goods
and services that it produces and then
sells to other nations
The US and International Trade
• Int’l trade for the US is beneficial and
necessary
• Goods and services are traded
• IMPORTS- goods and services that one
country buys from other countries
• What would it be like with no imports?
The Basis for Trade
• Absolute Advantage-when a country
can produce a product more efficiently
(a greater amount) than can another
country
• Sometimes, it is cheaper to import a
product than to make it yourself
Total Output Before
Specializing
Total Output After Specializing
Country A
Country A
Country B
Coffee 20
+
5
=25
Cashews 4
+
1
=5
Country B
Coffee 40
Cashews
0
+
0
=40
+
6
=6
Comparative Advantage
• The ability to produce a product
relatively more efficiently, or at a lower
opportunity cost.
Barriers to International Trade
• Done through 2 major ways:
• Tariff-a tax placed on imports to
increase their price in the domestic
market (graph)
• Quota-a limit placed on the quantities
of a product that can be importedleads to a decrease in supply (graph)
2 Kinds of Tariffs
• Protective-a tariff high enough to
protect less-efficient domestic
industries
• Real-life example
• Revenue-a tariff high enough to
generate revenue for the government
• Customs duties
Arguments For Protection
• National Defense (security)
• Becoming too dependent on foreign
countries
• a nation should be self-sufficient in goods
necessary for war
Promoting Infant Industries
• New and emerging industries within a
country that need protection from
other more established foreign
industries
• Cars in Latin America
Protecting Domestic Jobsemployment protection argument
• Tariffs and quotas are necessary to
protect American jobs that could go
foreign if not protected.
• Complacency and improvement
arguments
The Inevitable Argument
• all nations have barriers to trade so
barriers should be erected
The Industry Argument
• Certain industries should be protected
from competition
The Free Trade Movement
• World Trade Organization (WTO) 1947• Int’l agency that settles disputes,
organizes trade negotiations, provides
technical assistance for countries
NAFTA
• North American Free Trade Agreement
• All about cost-benefit analysis
• Free trade has allowed countries to
capitalize on comparative advantages
for everybody’s benefit
Trade Deficits and Surpluses
• Trade deficit-occurs when the value of
the products it imports exceeds the
value of products it exports.
• Trade Surplus-occurs when the value
of products it exports exceeds the
value of products it imports.
The International Value of the Dollar
• A stronger dollar compared to other
currencies- results in a trade deficit;
our products become more expensive
worldwide.
• A weaker dollar compared to other
currencies- results in a trade surplus,
or balance of trade; our products
become less expensive worldwide.