Set 5A — Trade & Comparative Advantage

What is International Political Economy (IPE)?

The study of the relationship between international politics and the economy, including trade and economic institutions.

What is trade?

The exchange of goods and services between countries.

What does the Office of the U.S. Trade Representative (USTR) do?

It represents U.S. trade interests and provides information about U.S. trade relations with other countries, territories, and regional associations.

According to the slides, how large was U.S. trade in goods and services in 2022?

Over $7.0 trillion in exports and imports; the United States was the world's second-largest trading nation, behind China.

What is absolute advantage?

A country has an absolute advantage over another country if it can produce a given product using fewer resources than the other country needs to use.

What is comparative advantage?

A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country.

What is opportunity cost?

The potential benefits a country misses out on when choosing one alternative over another.

How do you calculate the opportunity cost of producing one unit of a good?

Divide the amount of the other good that is given up by the amount of the good being produced.

Can a country have an absolute advantage in producing every good?

Yes. A country can have an absolute advantage in all goods, but it cannot have a comparative advantage in all goods.

What is the difference between absolute advantage and comparative advantage?

Absolute advantage compares resource efficiency; comparative advantage compares opportunity costs.

The U.S. can produce 4 planes or 8 ships per day. China can produce 3 planes or 2 ships per day. Which country has the absolute advantage in planes?

The United States, because it can produce 4 planes per day compared with China's 3.

Using the same example, which country has the absolute advantage in ships?

The United States, because it can produce 8 ships per day compared with China's 2.

What is the U.S. opportunity cost of producing 1 plane?

2 ships, because producing 4 planes means giving up 8 ships.

What is the U.S. opportunity cost of producing 1 ship?

0.5 planes, because producing 8 ships means giving up 4 planes.

What is China's opportunity cost of producing 1 plane?

2/3 of a ship, because producing 3 planes means giving up 2 ships.

What is China's opportunity cost of producing 1 ship?

1.5 planes, because producing 2 ships means giving up 3 planes.

Which country has a comparative advantage in producing planes in the U.S.–China example?

China, because its opportunity cost for 1 plane is 2/3 of a ship, lower than the U.S. cost of 2 ships.

Which country has a comparative advantage in producing ships in the U.S.–China example?

The United States, because its opportunity cost for 1 ship is 0.5 planes, lower than China's cost of 1.5 planes.

According to comparative advantage, what should the U.S. and China specialize in?

The United States should specialize in ships, and China should specialize in planes.

What is a mutually beneficial terms of trade?

A trading price that makes both countries better off than producing everything themselves.

In the U.S.–China example, what is an acceptable trading price for 1 ship in terms of planes?

More than 0.5 planes but less than 1.5 planes per ship, so both countries can benefit.

What four skills does the comparative advantage handout say you need to demonstrate?

Identify absolute advantage; calculate opportunity costs; identify comparative advantage; identify terms of trade that benefit both countries.

What limitations of comparative advantage does the handout identify?

It assumes no transportation costs or environmental-regulation costs, no import controls, ignores non-price competitiveness, and does not account for the costs individuals face when transitioning to another industry.

What point does Dwight D. Eisenhower's “Chance for Peace” quotation illustrate about opportunity cost?

Resources spent on military goods and weapons cannot be spent on other needs, such as schools, hospitals, housing, food, and infrastructure.