an environment in which trade does not exist
no international trade
imports - exports
A country has a comparative advantage in the production of a good when the opportunity cost of producing a particular good is lower in any one country
Differences in opportunity costs lead to comparative advantage in different goods; RELATIVE opportunity cost
Country can be absolutely better at producing a good, but the opportunity cost could be very high (i.e. inefficient to produce this good) - and therefore they don’t have a comparative advantage
Does the US have a trade deficit or surplus?
According to the lecture, the United States has around a $50 billion trade deficit, because it exports around $200 billion and imports around $250 billion.
Why is specialization beneficial?
When countries have different comparative advantages in the production of different goods, there are potential gains from trade through specialization each country produces what it has a comparative advantage in producing.
Country A has a comparative advantage in good X over Country B if…
…Country A has a lower opportunity cost for producing good X than Country B
Calculate comparative advantage
Comp adv of good A = good B / good A
Allowing trade can create…
…create economies of scope through the mechanism of comparative advantage which leads to specialization
Economies of scope yield gains from trade
Where does comparative advantage come from?
- Factor endowments - natural resources, large population etc.; naturally have more of a resource that is cheap for you to turn into a product
- Technology advantage - because knowing how to make a good efficiently can lower the opportunity cost of supplying that good. (diminishes over time as other countries steal/learn these technologies)
Welfare impacts from international trade?
In a competitive model, opening to trade unambiguously increases total welfare but usually at the expense of either consumers or producers
What happens to domestic supply and demand when we start exporting goods?
World supply curve shifts inward/left, the US is losing some of its domestic production of computers. This raises the equilibrium prices, lowering domestic demand of computers.
The new world price will cause domestic suppliers to want to produce more computers. Now the difference between domestic quantity supplied vs. demanded are the exports.
What happens to domestic supply and demand when we start importing goods?
World supply curve shifts outward/right, the domestic demand for roses increases because the world price is lower than the initial price. Consumers want more roses, but producers will produce less at this lower price.
The difference between domestic quantity demanded vs. supplied are the imports.
Do exports usually raise producer or consumer surplus?
Do imports usually raise produce or consumer surplus?
Tax levied on imported goods
What are the effects of tariffs?
By taxing imports, tariffs shift the global supply curve, which raises the price of the good. Domestic production increases and domestic consumption decreases because of the higher price. Since the remaining imports are taxed, government revenue also increases.
What are the downsides of tariffs?
Tariffs on other country’s imports could cause those countries’ to retaliate with their own tariffs, which would hurt domestic producers. Even on their own, the loss to consumers from tariffs generally outweighs the gains to producers and increases in government revenue. The increased domestic production is an effect of tariffs, but is generally not seen as a downside.
Why are people opposed to free trade?
- Our political system is uniquely bad at compensating the losers; there are winners & losers and there’s no compensation for individuals who lose their jobs
- Creation of comparative advantage can itself be damaging. (i.e. pollution in China) We support bad working conditions and environmental pollution, etc by supporting free trade
What are possible problems with free trade?
As shown in the previous examples, free trade creates both winners and losers. Overall, there will be more benefits than costs, so the country should be able to compensate the losers, but generally this does not happen. Additionally, some countries create their comparative advantage through environmental or labor policies that the country may not want to support and trading with them only increases the effect of these policies.
Equity concerns, undermine environmental protection policies, undermine labor policies.