1. International Trade

2. 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

3. 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???

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

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

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

7. 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

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

9. 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

10. 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

11. 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

12. Trade Barriers Used to raise revenue
Used to protect domestic industries

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

14. 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

15. 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)

16. Standards health and safety measures FDA Requirements Food additives
Drug restrictions

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