International Trade

Why International Trade Everyone wins Allows for specialization which leads to greater efficiency, production and profit Provides for greater variety of goods and lower costs to consumers

Why International Trade? No nation can produce everything it needs (scarcity). So all nations engage in some type of trade…. How do we determine what we make and what we trade for???

Without Trade JAPAN FRANCE CHEESE 50 TONS 40 TONS FISH 200 TONS

WITHOUT SPECIALIZATION Japan has absolute advantage in both products Both countries have both products but not at best combination

WITH SPECIALIZATION Comparative Advantage - country with lowest opportunity cost has comparative advantage for that product

Comparative Advantage Japan has opportunity cost of 4 tons of fish for 1 ton of cheese France has opportunity cost of 2 tons of fish for 1 ton of cheese France specializes in cheese; Japan specializes in fish France trades 1 ton of cheese for 3 tons of fish Both countries benefit

With Trade Both countries specialize Both citizens have benefit of both products with lower opportunity costs Both countries win

Comparative Advantage Practice Which country has an absolute advantage in radios? Bicycles? Who has the comparative advantage in radios? Bicycles? What should country A produce? What should country B produce? radios bicycles Country A 50K 10K Country B 5K

Comparative Advantage Practice Answers Country A has an absolute advantage in both radios and bicycles. It can produce more of each product than can country B. Country A – opportunity cost for radios = 10/50 or 1/5 bicycle; opportunity cost for bicycles = 50/10 or 5 radios Comparative Advantage for radios Country B - opportunity cost for radios = 5/10 or ½ bicycle; opportunity cost for bicycles is 10/5 or 2 radios Comparative Advantage for bicycles

radios bicycles 50K 10/50 = 1/5 bicycle 10K 50/10 = 5 radios Country A 50K 10/50 = 1/5 bicycle 10K 50/10 = 5 radios Country B 5/10 = ½ bicycle 5K 10/5 = 2 radios

Trade Barriers Used to raise revenue Used to protect domestic industries

Quotas Limit amount of imports Prevent “dumping” Protects domestic producers

Tariffs Fee charged to another country to sell their products in U.S. or other foreign country Revenue tariffs Used to raise money Protective Tariffs Protects domestic producers by raising prices of imported goods

Embargoes Cuts off most or all trade with a specific country Used for political reasons U.S. embargo against Cuba (result of communist actions of early 1960s U.S. embargo against Iran (hostage crisis of late 1970s)

Standards health and safety measures FDA Requirements Food additives Drug restrictions

Effects of Trade Barriers Higher prices Reduced access to variety of goods Trade wars Protectionism Protects domestic jobs Protects infant industries Protects national security