Introduction to International Trade and Trade Policy

1
Introduction toInternational Trade and Trade
Policy
2
Comparative Advantage

• Comparative advantage when a country (or firm)
  has a lower opportunity cost of producing a good
  or service
• Lower opportunity cost implies that a country (or
  firm) can sell a good or service at a lower price
• Specialization in areas where there is a
  comparative advantage enables mutually beneficial
  gains from trade

3
Gains From Free Trade

• In markets with a comparative disadvantage
• Goods are imported
• CS increases
• PS decreases
• TS increases
• In markets with a comparative advantage
• Goods are exported
• CS decreases
• PS increases
• TS increases

4
An Example of Trade Policy Analysis Tariffs on
Imports

• Comparison to free trade
• CS decreases
• PS increases
• TS decreases
• Imports decrease
• The government raises revenue

5
General Observations

• TS is greater with free trade than with no free
  trade
• TS is greater with free trade than with tariffs
  (or quotas)
• There are winners and losers with free trade
  and trade policies

6
Common Arguments Against Free Trade

• Loss of jobs
• National security
• Protection of infant industries
• Unfair competition
• Protection as a bargaining chip
• Sweatshops
• Environmental consequences