Chapter Seventeen

INTERNATIONAL TRADE WHY TRADE? It benefits are all around us, giving us options in our life Caviar, Coffee & Mangos

ABSOLUTE ADVANTAGE producing a level of output using less resources than the competition=> Adam Smith What if a country doesnt have an absolute advantage? Does it pay for a country to trade with another country if it has an absolute advantage in all production compared to the other country?

COMPARATIVE ADVANTAGE If production costs (opportunity costs) differ then there are gains from trade even if a country has an absolute advantage in producing everything. => David Ricardo Trade by way of Specialization increases the standard of living world wide.

Example U. S. Japan Hamburgers Samurai Swords Opportunity Cost U.S. 4 Hamburgers for 1 Samurai Sword Japan 2 Hamburgers for 1 Samurai Sword U.S.Trade Japan 3 Hamburgers For 1 Samurai Sword

Balance of Trade The balance between X-M (some books EX-IM) X=M Balance Trade X>M Trade Surplus X<M Trade Deficit

Tariffs A tax on imports, domestic producers raise prices.

Quotas A quantity limit imposed on imports, domestic producers raise price and importers make more because prices are higher.

Terms of Trade are dependent On the relative domestic opportunity cost between two countries. The terms of trade are also affected by currency values The larger country usually dictates the other terms of trade. Who benefits most from trade? The smaller country.

Exchange Rates