International Trade & Tariffs: Comprehensive Notes

Understanding International Trade and Tariffs

The Analogy of Trade and Specialization

• Trade as a Relationship: Trade between two countries is akin to a relationship between two people, where partners learn to work with and depend on each other.
• Opportunity Cost and Specialization: Individuals or countries specialize in tasks where their opportunity cost is lower.
  • Example: If Dad is inefficient at ironing shirts, it makes sense for him to specialize in cooking. His opportunity cost of cooking a dinner is, for instance, a quarter of a shirt ( \frac{1}{4} \text{ shirt} ). This means it's economically beneficial for him to focus on cooking.

Introduction to Free Trade (Import Scenario)

• Domestic Equilibrium Review: Prior to trade, a good might have a domestic demand curve (e.g., with a reservation price of \text{ \$6} ) and a supply curve, leading to an equilibrium price of \text{ \$3} and a quantity of 6 . This concept is assumed to be familiar.
• Scenario for Imports: Consider a good that costs \text{ \$3} to produce in Canada, but has a world price of only \text{ \$1} . This situation parallels the