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- If there is a specialization a country can keep the good that it has not
exported and can import the good it is not good at producing – gain both
at lower costs – and vice versa
- Countries are able to consumer at a point beyond their PPCs – amount
of gain depends on exchange rates
Does the theory of comparative advantage always work (HL)
- Only works when there are different opportunity costs – if they are the
same there are no gains to be made from trade
What gives a country a comparative advantage (HL)
- Based on abundance of certain factors – land agriculture, unskilled
labour production of manufactured goods, educated labour
financial services, beaches tourism – price of factor is lower than the
price of other factors – making opportunity cost pf things using that
factor be lower than in other countries
Limitations of comparative advantage (HL)
- Assumption of perfect knowledge of where the least expensive goods
may be purchased
- Assumption that there are no transport costs – those costs may erode the comparative
advantage and eliminate its competitiveness
- Normally assumes that there are two economies producing two goods – this however
can be overcome with technology and simulations – comparative advantage may be
found in multiple countries
- Assumption that costs do not change – economies of scale, however, do exist – costs
fall
- Non-identical goods – consumer durables – are harder to compare and see if a country
has a comparative advantage or not
o E.g., Japan’s Toshiba television vs Phillips television
- Factors of production do not necessarily remain in the country that has the advantage
– capital may be moved to developing countries instead
- Free trade might not necessarily be present – government trade barriers may be placed
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o Works in the short-run and the issue is not fixed + other countries may also
impose similar measures
Arguments against trade protection
- Raised prices to consumers and producers of imports
- Less choice for consumers
- Reduced competition, firms become inefficient, innovation is reduced, export
competitiveness may be reduced
- Comparative advantage is distorted – inefficient use of resources; specialization is
reduced
- Trade war
- Economic growth may be hindered (see previous reasons)
Main types of protectionism
Tariffs
- Tax charged on import goods – supply shift upward by amount of
tax (World Supply curve)
o When supply is shifted domestic producers receive more
revenue – from g to g+a+b+c+h and foreign producers
receive less, from h+i+j+k to i+j and government receives
d+e
o Dead-weight loss – loss of consumer surplus at point f
o Dead-weight loss – loss of producer surplus at h+c – inefficiency of the firms
against the export producers – more resources are used than necessary
- Importers pay higher prices – it would thus increase costs of production, forcing
consumers to pay more, and thus reducing international competitiveness
o E.g., Car production
- Can be used as an anti-dumping measure
International trade subsidies
- Subsidy to domestic producers to make them competitive – S shifts to the right
o Producers produce at point Q3, revenue increases from a
to a+b+e+f+g, Exporters Q3Q2 revenue falls from b+c+d
to c+d, government pays at points e+f+g
o Dead-weight lost at points b+g – inefficient production
and allocation of resources – other producers would
produce at point b
o No consumer loss however in long-term they might have
to pay higher taxes to fund those subsidies
Quotas
- Physical limit on number/value of imported goods
o A quota is imposed on Q1Q3 point – therefore all imports at points Q3Q2 are
not allowed to be imported
o As price at point Q3 is higher at Pquota domestic producers begin increasing
production shifting it – demand falls to point Q4
o Domestic producers’ revenue = from a to a+c+d+f+i+j
o Foreign producers’ revenue = from b+c+d+e to b+g+h
o Dead weight loss – consumer surplus loss at k
o Dead weight loss – domestic producers produce at c+d+j – inefficient
allocation of resources
Administrative barriers
- Red tape: administrative process for imported goods – ports that are hard to reach,
lengthy paperwork, legal work = slows down imports
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