International Trade Chapter 17

Absolute and Comparative Advantage Ch 17 Sec 1

What do you guys think about international trade? What do you guys think about international trade?

Specialization Countries or regions specialize in certain products Countries or regions specialize in certain products EX: New York is financial industry, Detroit is automobiles, Midwest is farming EX: New York is financial industry, Detroit is automobiles, Midwest is farming **Exports- the goods and services that a country produces and sells to other nations **Exports- the goods and services that a country produces and sells to other nations

US and International Trade **Imports- goods or services that one country buys from other countries **Imports- goods or services that one country buys from other countries Increasing in numbers and becoming a huge part of global economy Increasing in numbers and becoming a huge part of global economy Without international trade much of the world would not have certain products Without international trade much of the world would not have certain products

Absolute vs Comparative Advantage **Absolute advantage- is when a country can produce a product more efficiently then another **Absolute advantage- is when a country can produce a product more efficiently then another Problems are that large producing country cannot trade with a smaller output and both benefit Problems are that large producing country cannot trade with a smaller output and both benefit **Comparative Advantage-the ability to produce a product relatively more efficiently or at a lower opportunity cost **Comparative Advantage-the ability to produce a product relatively more efficiently or at a lower opportunity cost

Gains From Trade Produce what you produce best Produce what you produce best Sell what you produce best and trade it with countries that produce something you need Sell what you produce best and trade it with countries that produce something you need

Barriers to International Trade Section 2

Restrictions on Trade Tariff- a tax on imports to increase price in domestic market Tariff- a tax on imports to increase price in domestic market Quota- limit of number of goods can be imported Quota- limit of number of goods can be imported Protective tariff- a tariff high enough to protect less efficient domestic industries Protective tariff- a tariff high enough to protect less efficient domestic industries Pencil cost 35 cents in china and a dollar here we make 95 Cent tariff now it is $1.30 Pencil cost 35 cents in china and a dollar here we make 95 Cent tariff now it is $1.30

Restrictions on Trade Revenue tariff- a tax high enough to make revenue for government Revenue tariff- a tax high enough to make revenue for government Was main source of income till income tax passed in 1913 Was main source of income till income tax passed in 1913 Quotas can help protect domestic products but can also raise prices Quotas can help protect domestic products but can also raise prices Dumping- selling products abroad at less then it cost to produce at home Dumping- selling products abroad at less then it cost to produce at home

Other Barriers Health inspections Health inspections License and fee’s License and fee’s Health issues such as genetically altered food Health issues such as genetically altered food

Protectionism vs Free Trade **Protectionist favor trade barriers that protect domestic industries **Protectionist favor trade barriers that protect domestic industries **Freed traders favor fewer of even no trade restrictions **Freed traders favor fewer of even no trade restrictions

National Defense Become to specialized that in war not be able to get necessary supplies Become to specialized that in war not be able to get necessary supplies Small countries build up arms for this reason Small countries build up arms for this reason Better economy and smaller supply or smaller economy with bigger supply???? Better economy and smaller supply or smaller economy with bigger supply????

Promoting Infant Industries Infant industries argument- the belief that new industries should be protected Infant industries argument- the belief that new industries should be protected How long? How long? How much? How much? Many do not want to give up protection Many do not want to give up protection Latin America still struggles to have a competitive industry due to all the protection thus high tariffs on used cars Latin America still struggles to have a competitive industry due to all the protection thus high tariffs on used cars

Protecting Domestic Jobs Prevent jobs from going to cheaper countries over seas Prevent jobs from going to cheaper countries over seas Free traders argue that it does not encourage companies to become better Free traders argue that it does not encourage companies to become better Profit reward the efficient and hard working, while losses eliminate the inefficient and weak Profit reward the efficient and hard working, while losses eliminate the inefficient and weak

Keeping the Money at Home Keep money in the United States rather then abroad Keep money in the United States rather then abroad Free traders point out that money does generally come back again Free traders point out that money does generally come back again It can hurt those who depend on exports for their job It can hurt those who depend on exports for their job

Balance of Payments Running more exports vs running more imports Running more exports vs running more imports Economists believe should not restrict trade just to balance the two Economists believe should not restrict trade just to balance the two

Free Trade World Trade Organization- settles trade disputes and provides assistance for developing countries World Trade Organization- settles trade disputes and provides assistance for developing countries Reduce tariffs Reduce tariffs International trade flourished under this International trade flourished under this NAFTA has benefited all three nations with a combined GDP in 2003 of 12.7 Trillion NAFTA has benefited all three nations with a combined GDP in 2003 of 12.7 Trillion