Introduction to International Trade and Trade Policy

This set of flashcards covers the fundamental vocabulary of international trade, including trade models, the effects of tariffs and quotas, and the political arguments surrounding trade policy.

Gains from Trade

The increase in the economic pie or overall well-being of an economy that occurs when trade makes people better off.

Autarky

A situation where no trade is taking place and a country is not trading with other countries.

Autarky Price

The price of a good or service that would exist in a domestic market in the absence of international trade, denoted as $P^*$.

Comparative Advantage

The ability of a country to produce a good at a lower opportunity cost or more efficiently than another country.

World Price

The price of a good that prevails in the world market for that good, denoted as $P_W$.

Exporter

A country that sells a good to the rest of the world because the world price is higher than its autarky price (P_W > P^*).

Importer

A country that buys a good from the rest of the world because the world price is lower than its autarky price (P_W < P^*).

Consumer Surplus

The area under the demand curve and above the price, representing the benefit received by consumers.

Producer Surplus

The area under the price and above the supply curve, representing the benefit received by sellers.

Tariff

A tax imposed specifically on goods that are imported into a country.

Government Revenue (from Tariff)

The income generated by a tariff, calculated as the amount of the tariff ($T$) multiplied by the quantity of imports ($Q_{imports}$).

Deadweight Loss (of a Tariff)

The fall in total surplus that results from a market distortion like a tariff, represented as the sum of production and consumption distortions.

Production Distortion

A type of deadweight loss caused by a tariff that creates an incentive for inefficient domestic sellers to produce the good when it is available at a lower cost on the world market.

Consumption Distortion

A type of deadweight loss caused by a tariff where the higher domestic price discourages consumers from buying goods they value more than the world price.

Import Quota

A trade policy that sets a quantity limit or cap on the number of units of a good that can be imported into a country.

Economies of Scale

The reduction in the cost of production that occurs when a firm increases its scale of production and becomes more efficient.

Rent Seeking

Behavior where firms or industries seek special favors or protections, such as tariffs or quotas, from the government.

The Jobs Argument

The argument against free trade claiming that opening up trade destroys domestic jobs in certain sectors, though economists argue it often creates jobs in others.

The National Security Argument

The argument that certain industries must be protected to ensure a reliable domestic supply of essential materials, like steel, in the event of war.

The Infant Industry Argument

The claim that new industries need temporary protection from foreign competition to help them grow and become established before they compete on the world market.

The Unfair Competition Argument

The claim that domestic firms should not have to compete against foreign firms that receive special treatments or subsidies from their own governments.

Protection as a Bargaining Chip

The use of trade restrictions or the threat of them as a political tool to negotiate for better trade terms from other countries.

Prisoner's Dilemma

A game theory problem where two parties have strong incentives to follow a strategy that makes them both worse off than if they cooperated; in trade, it refers to the incentive for countries to choose protectionism over free trade.

NAFTA

The North American Free Trade Agreement, a group of North American countries cooperating to facilitate free trade.

GATT

The General Agreement on Trade and Tariffs, a trade organization of countries working together to reduce trade barriers and cooperate on trade policy.