International Trade Summary

  • International Trade Overview

    • Countries engage in trade (imports and exports) to improve citizens' well-being.
    • Autarky: Means no trade.

  • Absolute vs. Comparative Advantage

    • Absolute Advantage: Ability of a country to produce more of a good than another country using the same resources.
    • Comparative Advantage: Ability of a country to produce a good at a lower opportunity cost than another country.

  • Gains from Trade

    • Countries benefit from specializing based on comparative advantage, leading to consumption outside their autarky Production Possibility Frontier (PPF).
    • Net Gains: Export producers and import consumers gain while consumer losses are less than producer gains.

  • Terms of Trade

    • Defined as average price of exports divided by average price of imports.
    • As production shifts more towards one product, opportunity costs change.

  • Trade Restrictions

    • Tariffs: Taxes on imports; raise prices and protect domestic industries but can lead to losses for consumers.
    • Quotas: Limits on quantity of imports; also raise prices without generating government revenue.

  • Arguments Against Free Trade

    • Economic arguments: Competition, infant industry protection, and anti-dumping regulations.
    • Globalization concerns: Effects on employment, environment, and working conditions in developing countries.

  • Key Terms

    • Autarky, imports, exports, absolute advantage, comparative advantage, terms of trade, tariff, quota, infant industry, dumping.

  • Practice Questions

    • Why does the U.S. export farm products?
    • Would a tariff on televisions be beneficial?