Chapter 20 International Trade

Protection raises the price of a product in three ways:

1 The price of the imported product goes up; 2 The higher price of imports causes some consumers to shift their purchases to higher-priced domestically produced goods; 3 The prices of domestically produced goods rise because import competition has declined.

Comparative advantage

A country (or an individual) has a comparative advantage in producing a good or service if its opportunity cost of producing the good or service is lower than other countries'.

Absolute advantage

A country has an absolute advantage in producing a good or service if the country can produce more output per worker than other countries.

Import demand curve

A downsloping curve showing the amount of a product that an economy will import at each world price below the domestic price.

Export subsidy

A government payment to a domestic producer to enable the firm to reduce the price of a good or service to foreign buyers.

Import quota

A limit imposed by a nation on the quantity (or total value) of a good that may be imported during some period of time.

Revenue tariff

A tariff designed to produce income for the Federal government.

Protective tariff

A tariff designed to shield domestic producers of a good or service from the competition of foreign producers.

Tariff

A tax imposed by a nation on an imported good.

Nontariff barrier (NTB)

All barriers other than protective tariffs that nations erect to impede international trade, including import quotas, licensing requirements, unreasonable product-quality standards, unnecessary bureaucratic detail in customs procedures, and so on.

Export supply curve

An upward-sloping curve that shows the amount of a product that domestic firms will export at each world price that is above the domestic price.

Economic Impact of Quotas

Quotas have the same economic impact as a tariff, with one big difference: While tariffs generate revenue for the domestic government, a quota transfers that revenue to foreign producers.

Absolute advantage: Example

Suppose that the United States is actually better than Brazil at all kinds of aircraft production. In that case, we would say that the United States has an absolute advantage in both large-jet and small-jet production: in an hour, an American worker can produce more of either a large jet or a small jet than a Brazilian worker.

World price

The international market price of a good or service, determined by world demand and supply.

Domestic price

The price of a good or service within a country, determined by domestic demand and supply.

Equilibrium world price

The price of an internationally traded product that equates the quantity of the product demanded by importers with the quantity of the product supplied by exporters; the price determined at the intersection of the export supply curve and the import demand curve.

Comparative advantage: Example

United States has a comparative advantage in the production of large jets and Brazil has a comparative advantage in the production of small jets.

Voluntary export restriction (VER)

Voluntary limitations by countries or firms of their exports to a particular foreign nation to avoid enactment of formal trade barriers by that nation.