International Economics: Comparative Advantage

These flashcards cover key concepts related to international economics, comparative advantage, trade policy effects, and the implications of tariffs.

What is comparative advantage?

Comparative advantage is the ability of a country to produce a good at a lower opportunity cost than another country.

What does absolute advantage refer to?

Absolute advantage refers to the ability to produce more of a good with fewer resources than others.

What determines what a country should export or import?

It is determined by comparative advantage, not absolute advantage.

What is the price litmus test in international trade?

If the world price of a good is greater than the domestic price, it signals that the country has a comparative advantage and should export.

What happens when the world price is lower than the domestic price?

It means that foreign producers have a comparative advantage, and the country should become an importer.

What is an open economy?

An open economy is one that engages in international trade, buying and selling goods with other countries.

What is a closed economy?

A closed economy is one that does not engage in any international trade.

What are the winners and losers when a country exports goods?

Winners are domestic producers who can sell at higher world prices; losers are domestic consumers who face higher prices.

Who benefits and suffers when a country imports goods?

Consumers benefit from lower prices and greater variety, while domestic producers suffer due to increased competition from abroad.

What does 'total surplus' refer to in trade?

Total surplus is the overall economic benefit to a country from engaging in trade, which typically increases despite localized losses.

What is a tariff?

A tariff is a tax on imports designed to protect domestic industries from foreign competition.

What is deadweight loss in the context of tariffs?

Deadweight loss represents the economic value that is lost when tariffs prevent mutually beneficial transactions from occurring.

What is the jobs argument in trade policy?

The jobs argument is the claim that cheaper imports lead to the loss of domestic jobs.

What does the national security argument advocate for in trade policy?

It advocates for protecting certain key domestic industries to ensure independence during crises.

What is the infant industry argument?

It suggests that new domestic industries need temporary protection to grow and compete globally.

What is the unfair competition argument?

This argument states that domestic industries face unfair competition from foreign firms receiving government subsidies.

What is the bargaining chip argument regarding tariffs?

This argues that tariffs should be used as leverage to negotiate better trade deals.

What specific challenge do governments face when managing localized job destruction from trade?

Governments need to address the political economy of retraining, relocating, or retiring affected workers.