Econ. Chapter 16

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for the world as a whole, the grains from international trade are due to increased production as nations specialize according to comparative advantage. How those world gains are distributed among specific countries depends on the terms of trade

imports

goods and services produced abroad, but consumed domestically

exports

goods and services produced domestically, but sold abroad

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for any particular good or service, the costs from expanded trade are highly concentrated among relatively few parties, while the benefits are widely dispersed among many. As a result, those harmed by international trade generally have more incentive to mobilize and lobby than those who benefit.

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international trade makes each country, as a whole, better off. But not everyone gains, because cheap imports from abroad-while beneficial to domestic consumers-are harmful to domestic producers

strategic trade policy

protectionist policies designed to capture social benefits, such as greater tax revenue, from having an industry in the domestic country

infant industry argument

the argument that a new industry in which a country has a comparative advantage might need protection from foreign competition in order to flourish

protectionism

the belief that a nation's industries should be protected from foreign competition

terms of trade

the ratio at which a country can trade domestically produced products for foreign-produced products

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through international trade based on comparative advantage, all nations can achieve greater total consumption of goods and services, and therefore higher living standards, than is possible without trade

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when countries specialize according to their comparative advantage, the world's resources are used more efficiently, enabling greater production of every good

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a country that has relatively large amounts of a particular resource will tend to have a comparative advantage in goods that make heavy use of that resource

quota

a limit on the physical quantity of imports

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a nation has comparative advantage in producing a good if it can produce it at a lower opportunity cost than some other country

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a quota has effects similar to a tariff: it reduces imports, raises the domestic price, thereby helping domestic producers of the good but reducing the gains from trade to the country as a whole

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a tariff reduces the volume of trade and raises the domestic price of an imported good. In the country that imposes the tarrif, producers of the good gain, but consumers lose. The country as a whole loses, because tariffs decrease the volume of trade and therefore decrease the gains from trade

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both quotas and tariffs reduce the gains from trade. But a tariff has one saving grace that a quota lacks: increased tax revenue

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countries often develop strong comparative advantages in the goods they have produced in the past, regardless of why they began producing those goods in the first place

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production is most likely to reflect the principle of comparative advantage when firms can obtain funds for investment projects and when they can freely enter industries that are profitable. Thus, free trade, without government intervention, works best when markets are working well.