Trade

Absolute Advantage

Ability to do a task with fewer inputs

Comparative Advantage

Ability to do a task at a lower opportunity cost. Most efficient outcome is due to comparative advantage.

Opportunity Cost

What is given up / what is gained

Explain how price is a signal

Signals to producers how much consumers desire a product, signals to buyers how much it costs to make a product

Rational Rule for Trade

Import only if foreign price + trade costs < domestic price

Export only if foreign price - trade costs > domestic price

Tariffs

Domestic taxes on imported goods, designed to reduce imports

Sources of comparative advantage at the international trade scale

• Abundance of resources

• Mass production

• Specialized skills (unique way of doing things)

Autarky

Completely domestic market with absolutely no international trade

Consequences of imports

New price creates a shortage between domestic supply and demand, which is filled by imports. Revenue = imports x tariffs.

Consequences of exports

New price creates a surplus of goods, which are then exported to other nations

Dumping

Company reduces their prices heavily, starving competition and driving them out of business.

Government revenue due to tariffs

Tariff x quantity of imports

Reading a two-person PPF

• Kink in the graph is the optimal output

• Flatter slope, then steeper slope; lowest opportunity cost comes first, then the second

• Kink can be found by just calculating the output from a team minimizing opportunity cost