International Trade

Comparative Advantage Comparative Advantage: The situation in which a country can produce a good at a lower opportunity cost than another country. Countries specialize in the production of the good in which they have a comparative advantage

Comparative Advantages After they have specialized in production, the two countries must settle on the terms of trade. A country gains by specializing in producing and trading the good in which it has a comparative advantage It is individuals’ desire to earn a dollar, euro, or a pound that determines the pattern of international trade. The desire to earn a profit determines what a country specializes in and trades.

Q & A Suppose the United States can produce 120 units of X at an opportunity cost of 20 units of Y, and Great Britain can produce 40 units of X at an opportunity cost of 80 units of Y. Identify favorable terms of trade for the two countries. If a country can produce more of all goods than any other country, would it benefit from specializing and trading? Explain your answer.

Trade Restrictions Specialization and international trade benefit individuals in different countries. But this benefit occurs on the net. Every person may not gain. Consumers’ Surplus = Maximum Buying Price – the Price Paid. Producers’ Surplus = Price Received – Minimum Selling Price

Consumers’ and Producers’ Surplus

Tariffs A Tariff is a tax on imports. The primary effect of a tariff is to raise the price of imported goods to the domestic consumer. The effects of the tariff are a decrease in consumers’ surplus, an increase in producers’ surplus, and tariff revenues for government.

Tariffs and Consumer’ surplus, and producer’s surplus Consumers receive more consumers’ surplus when tariffs do not exist and less when they do. Producers receive less producers’ surplus when tariffs do not exist and more when they do exist.

The Effects of a Tariff

Quotas A Quota is a legal limit on the amount of a good that may be imported. Because the loss to consumers is greater than the increase in producers’ surplus plus the gain to importers, there is a net loss as a result of the quota.

Quotas, Consumer’s surplus, and Producer’s surplus A quota reduces the supply of a good and raises the price of imported goods to domestic consumers. The effects of a quota are a decrease in consumers’ surplus, an increase in producers’ surplus, and an increase in total revenue to the importers who sell the allowed number of imported units.

The Effects of a Quota

Why Nations Restrict Trade National Defense Argument: Certain industries should remain based in our country, especially if they manufacture items vital to our defense. Infant Industry Argument: New industries must be protected from older, established foreign competitors until they are mature enough to compete. However, removing that protection is almost impossible.

Why Nations Restrict Trade (cont.) Antidumping Argument: Dumping is the sale of goods abroad at a price below their cost and below the price charged in the domestic market. A foreign competitor could wipe out a market by dumping their products in America. Foreign – Export – Subsidies Argument: Some governments subsidize the firms that export goods.

Why Nations Restrict Trade (cont.II) Low Foreign Wages Argument: American producers can’t compete with foreign producers because American producers pay high wages to their workers and foreign firms pay low wages. A country’s low wage advantage may be offset by its productivity disadvantage. High wages means High productivity. Low wages mean low productivity. Saving Domestic Jobs Argument: This argument is actually most of the previous arguments but in disguise.

What Price Jobs? “Voluntary” Export Restraint (VER) is an agreement between two countries in which the exporting country “voluntarily” agrees to limit its exports to the importing country.

World Trade Organization “[The WTO’s] overriding objective is to help trade flow smoothly, freely, fairly, and predictably.” It does these things by administering trade agreements, acting as a forum for trade negotiation, settling trade disputes, reviewing national trade policies, assisting developing countries in trade policy issues, and cooperating with other international organizations. The WTO, in theory, is supposed to lead to freer international trade, and there is some evidence that is has done just this. Critics often say that it has achieved this objective at some cost to a nation’s sovereignty.