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International Trade - chapter 17

17.1. Comparative Advantage

  • Comparative advantage is the ability to produce a good or service at a lower opportunity cost than others can
  • Absolute advantage is the ability to produce more of a good than others can with a given amount of resources
  • It is comparative advantage, rather than absolute advantage, that determines which goods for trade
  • The most efficient economic arrangement is one in which each country specializes in the good for which it has a comparative advantage and trades with others
  • Characteristics such as climate, natural resources, factor endowment, and technology determine which goods and services a country will have a comparative advantage at producing
  • Because features like climate, population, and technology aren’t uniform throughout an entire country, incomplete specialization, in which a country produces some of many different kinds of goods, can also be efficient

17.2. And 17.3. Becoming a Net Importer

  • When a country moves from autarky to trade, the difference between the world price and the domestic price of a good determines whether the country becomes a net importer or net exporter
    • Autarky: an economy that is self-contained and does not engage in trade with outsiders
  • If the world price is lower than the domestic price, the domestic price will drop when the country opens to trade
  • In that case, domestic supply will no longer be sufficient to meet domestic demands at the lower price
  • Imported goodwill make up the difference, and the country will become a net importer
  • If the world price is higher than the domestic price, the domestic price will rise when the country opens up to trade
  • Domestic supply will outstrip domestic demand at the higher piece, and the country will export the excess supply, becoming a net exporter
  • Imports: goods and services that are produced in other countries and consumed domestically
  • Exports: goods and services that are produced domestically and consumed in other countries
  • When markets function well, total surplus increases when a country opens up to rade
  • The domestic distribution of surplus depends on whether the country becomes a net importer or net exporter of the good being traded
  • In net importing countries, consumers gain surplus from buying a larger quantity at a lower price; producers lose surplus from selling less at a lower price
  • When a country becomes a net exporter, consumers lose surplus from buying a smaller quantity at a higher price; producers gain surplus
  • In both cases, total surplus increases, making trade more efficient than autarky

17.4. Big Economy, Small Economy

  • Our previous examples hold only if the economy in question us a price taker
    • The decisions of its citizens about what quantity to produce or consume have no effect on the world price
  • If we are dealing with a “big” economy, its decisions would affect the world price
    • The economy’s move from autarky to free trade would
    • shift the world demand curve to the right because more consumers have entered the world market
    • shift the world supply curve to the right because more producers have entered the world market
  • Protectionism: a preference for policies that limit trade
  • trade liberalization: policies and actions that reduce trade restrictions

17.5. Tariffs

  • In order to raise public funds and redistribute surplus toward domestic producers, governments use import tariffs
    • Tariff: a tax on imported goods which causes inefficiency and deadweight loss
  • A tariff raises the domestic price of a good, causing a reduction in the quantity demanded, an increase in the quantity supplied domestically, and a reduction in the quantity imported
  • Domestic producers will enjoy an increase in surplus as a result of selling more at a higher price, and government will receive tax revenue
    • Domestic consumers lose surplus as a result of buying less at a higher price, and total surplus decreases

17.6. Quotas

  • import quota: a limit on the amount of a particular good that can be imported
  • The effect of a quota on domestic price and quantity is similar to the effect of a tariff: domestic price increases, quantity imported decreases
  • Domestic producers gain surplus from selling at a higher price; domestic consumers lose surplus from buying a lower quantity at a higher price
  • quota rents: the profits earned by the holders of import rights under a quota

17.7. International Labour and Capital

  • International trade equalizes the supply and demand factors of production across countries
  • In general, trade increases demand for factors that are domestically abundant, and it increases the supply of factors that are domestically scarce
    • The price of domestically scarce factors will typically drop due to increased foreign competition, and the owners of these factors lose surplus
    • In contrast, the price of domestically abundant factors increases due to increased demand, and owners will gains surplus
  • World Trade Organization (WTO): an international organization designed to monitor and enforce trade agreements, while also promoting free trade
  • Embargo: a restriction or prohibition of trade in order to put political pressure on a country

17.8. Labour and Environmental Standards

  • Each country has its own set of laws and policies governing the economy
  • These regulations vary among countries, which can be a source of friction when economic activity takes place across national boundaries
  • Policymakers and consumers approach the problem of inconsistent standards in several ways, ranging from explicit laws about imports to voluntary purchasing decisions by consumers