Chapter 18: International Trade and Comparative Advantage

comparative and competitive advantage on graphs

-absolute advantage is shown by having a higher intercept/production output on the PPF -comparative advantage is shown by the difference in slopes on the graph

is comparative or absolute advantage more important?

-comparative advantage is more important in determining the most efficient patterns of production.

How do corporations trade?

-exchange of national currencies -movement of labor and capital between countries

strategic argument for protection/protectionism

-nation may sometimes have to threaten protectionism to induce other countries to drop their own protection measures -basically, threatening to turn protectionist is the best way to achieve free/open trade, as it will force the other country to drop the protectionist policies. However, if it doesn't work, then protectionism increases... So, there is a risk.

difference between competitive and comparative

-production location does not matter for competitive advantage (produce can be produced anywhere), but it does matter for comparative advantage (produce must be produced within borders)

example of competitive advantage

-technologies of an IPhone are created in the U.S., which add a lot of value to the IPhone. Though this value is added in the U.S., it's produced internationally, where costs of labor are the cheapest. So, with the cheap production and value added domestically, it has competitive advantage. This is only possible due to globalization.

Who does the trading?

-the gov't doesn't trade; they don't produce anything. Rather, trade occurs between companies/corporations

will two similar or different countries benefit more from trade?

-two different countries!

Factors of international trade & why it's more difficult than intranational trade

1. political factors (i.e. an issue is the use and misuse of legal impediments to international trade, like tariffs) 2. currencies (they have variable exchange rates, which brings complications) 3. harder to move labor and capital internationally (this is much harder internationally--people are inhibited by personal costs of moving, the psychological burden, employment restrictions of foreigners, some countries have rules that limit foreign ownership)

Why should trade sometimes be inhibited?

1. to gain a price advantage for domestic firms (tariffs rig prices to favor domestic prices in order to benefit certain industries) 2. to protect particular industries from foreign competition 3. national defense/noneconomic considerations: regardless of cost, it's important to keep some industries in the domestic industry for security reasons (i.e. ban export to Cuba/Iran for political reasons) 4. infant-industry argument

Why do nations trade?

1. to import materials not available/not able to produce in home country (i.e. oil) (every country lacks vital resources that it can only get through trading with other countries) 2. import materials you can produce in home country, but it's more efficiently made internationally (each country's climate, labor force, and other endowments make it a relatively efficient producer of some goods and a relatively inefficient producer of others) 3. specialization permits larger outputs via the advantages of large-scale production (i.e. specializing in production allows to use economies of scale, increasing size of output while decreasing cost per unit)

Why trade? (summary)

1. trade has mutual benefits 2. PPF expands with trade 3. access to goods/services that you normally wouldn't produce 4. pushes you to specialize in production which you have advantage. -whichever country creates less value will get the last money from exports. You can't bring back jobs that have been outsourced to decrease costs of production unless the taxpayers pay for it...

competitive advantage

A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices (i.e. added value) -includes both cost advantage and differentiation advantage (value added) -production can take place in many locations, but the added value is domestic -competitive advantage is key for international trade because it removes barriers and allows for low transportation costs.

Absolute advantage

One country has AA over another in the production of a particular good if it can produce that good using smaller quantities of resources than the other country

tariff vs. quota (why a country would want tariffs instead)

both reduce international trade and increase domestic prices 1. some of the revenues resulting from tariffs go to the gov't of the importing country rather than foreign/domestic producers 2. unlike quotas, tariffs offer greater benefits to more efficient exporters

surprising principle of comparative advantage

even if one country is at an absolute disadvantage relative to another country in the production of every good, it still has a comparative advantage in making that good at which it is least inefficient (compared with the other country) -so, even if one has absolute advantage in every commodity/can produce every good more efficiently, there are still gains from trade if two countries specialize.

where should the rate of exchange between the goods fall?

if two countries trade two goods with one another, the rate of exchange between the goods must fall in between the price ratios that would prevail in the two countries in the absence of trade.

role of globalizaiton in international trade

it increases international trade because firms can take advantage of producing goods elsewhere at a cheaper rate, so it can gain competitive advantage through taking advantage of labor/technology.

quota

maximum amount of a good that is permitted into the country from abroad per unit of time.

Infant-Industry Argument

new industries need to be protected from foreign competition until they develop and flourish -government creates protection through subsidizing production. Production will be higher than the price of the good, but the subsidy will cover the difference to protect the industry. Ideally, as time, passes, the price of the product will decrease with demand and the subsidy will no longer be necessary

Comparative advantage

one country has comparative advantage over another in the production of a particular good relative to other goods if it produces that good less inefficiently (more efficiently) compared with the other country. -one country can produce a good at a lower opportunity cost than other country can -when every country does what it can do best/what it has CA in, all countries will benefit because more of every commodity can be produced without increasing the amounts of labor and other resources used.

export subsidy

payment by the government to exporters to permit them to reduce the selling prices of their goods so they can compete more effectively in foreign markets.

ways that governments can interfere with trade

tariffs, quotas, and export subsidy (infant-industry protection)

tariffs

tax on imports

specialization

though in examples, specialization is complete (i.e. japan produces all of one product and US produces all of another), in the real world it's usually incomplete. 1. countries are too small to provide the world's entire output even when they have a strong CA 2. PPFs are straight rather than curved because they create simpler answers.