International Trade

Benefits of free trade Nations can specialize in the production of goods in which they have a comparative advantage Maximizes efficient use of global resources (factors of production) By engaging in international trade based on the theory of comparative advantage a country can consume outside of it’s domestic production possibilities frontier

Trade barriers Tariffs – tax imposed on an import product which increases the cost of a foreign product to domestic consumers Quotas – limit on how much of a good can be imported Also called VERs (voluntary export restraint) Export Subsidies – government payments to firms that effectively lower the cost of production, enabling producers to lower their prices to compete in the international economy

Result of trade barriers Protect domestic sellers Hurts domestic buyers Net result – Higher prices Lower quantity