International Trade, Comparative Advantage, and Protectionism


Trade Surpluses and Deficits  All economies. the United States generally exported more than it imported-it ran a trade surplus. . In the mid 1970’s. regardless of their size. the United States began to import more merchandise than it exported-a trade deficit. depend to some extent on other economies and are affected by events outside their borders than it imports than it exports  Trade surplus: The situation when a country exports more  Trade Deficit: The situation when a country imports more  Until the 1970’s.

economist and member of Parliament. Principles of Political Economy was published in 1817. and restrictions enacted by the British Parliament in the early nineteenth century to discourage imports and encourage exports of grain . A  Corn Laws: The tariffs. even those that may be absolutely less efficient producers businessman. his principal work. subsidies.  David Ricardo: one of the father’s of modern economics. He used the theory of comparative advantage to argue against the Corn Laws.The Economic Basis for Trade: Comparative Advantage  Theory of comparative advantage: Ricardo’s theory that specialization and free trade will benefit all trading partners (real wages will rise). two years before he entered Parliament.

 Theory of Absolute Advantage: a concept coined by Adam Smith to counter mercantilist ideas in his book An Inquiry into the Nature and Causes of the Wealth of Nations.Mercantilism and Theory of Absolute Advantage  Mercantilism: an economic doctrine that the government control of foreign trade is of paramount importance for ensuring the prosperity and military security of the state. . using the same amount of resources. or firm. or country) to produce more of a good or service than competitors. It refers to the ability of a party ( an individual.

. but A’s climate is more suited to wheat and its labour is more productive. Country A enjoys an absolute advantage over country B in the production of wheat.Absolute Advantage versus Comparative Advantage  A country enjoys absolute advantage over another country in the production of a good if it uses fewer resources to produce that good than the other country does  For example: Country A and Country B produce what wheat. Country A will produce more wheat per acre than country B and use less labour in growing it and bringing it to market.

Now C and D must each choose . C’s climate is better than D’s and fewer of C’s resources are needed to produce a given quantity of both wheat and corn. A country enjoys a comparative advantage in the production of a good if that good can be produced at a lower cost in terms of other goods.  For Example: Countries C and D both produce wheat and corn and C enjoys an absolute advantage in the production of both-that is.

goods to foreign buyers depends in part on exchange rates.  When trade is free. they maximize their combined output and allocate their resources more efficiently independent decisions of thousands of importers and exporters and millions of private household and firms for imported products. When countries specialize in producing those goods in which they have a comparative advantage. patterns of trade and trade flows result from  Terms of trade: the ratio at which a country can trade domestic products  The relative attractiveness of foreign goods to the United States buyers and of U. Trade enables countries to move beyond their previous resource and productivity constraints. the ratios at which two currencies are traded for each other .S.

range that facilitates the flow of goods between nations). the free market will drive each country to shift resources into those sectors in which a country has a comparative advantage will be competitive in world markets  If exchange rates end up in the right range (that is. For any pair of countries. in a . Within that range. the exchange-rate will determine which country gains the most from trade. This lead us to conclude that exchange rates determine the terms of trade. there is a range of exchange rates that will lead automatically to both countries realizing the gains from specialization and comparative advantage.

However. the simple version of the theory of comparative advantage cannot explain why many countries import and export the same good. a country has a comparative advantage in the production of a product if that country is relatively well endowed with the inputs that are used intensively in the of that product. they also differentiate their products to please the wide variety of tastes that exists worldwide.The Sources of Comparative Advantage  The Heckser-Ohlin theorem looks to relative factor endowments to explain comparative advantage and trade flows. physical capital. This theory is consistent with the theory of comparative advantage. knowledge capital. land. According to the theorem.  Some theories argue that comparative advantage can be acquired.  A relatively short lists of inputs-natural resources. Just as . and skilled and unskilled labour-explains a surprisingly large portion of world patterns. industries within a country differentiate their products to capture a domestic market.

All are forms of protection through which some sector of the economy is shielded from foreign competition competition. Subsidies. The three most common are tariffs. export subsidies. . Export. and Quotas  Trade barriers take many forms. and quotas.  Dumping: a firm’s or an industry’s sale of production on the world market at prices below its own cost of production  Quota: a limit on the quantity of imports.Trade Barriers: Tariff.  Protection: the practice of shielding a sector of the economy from foreign  Tariffs: tax on imports  Export subsidies: Government payments made to domestic firms to encourage exports.

 Although the United States has historically been a high-tariff nation. development. its purpose is to reduce barriers to world trade and keep them down.S-Canadian Free Trade agreement signed in 1988. signed by the United States and 22 other countries in 1947. taking effect in 1994.S. Mexico. U. signed in 1988 by The United States.S.  Smoot-Hawley tariff: The U. and the North American Free Trade Agreement. It is set off an international trade war and caused the decline in trade that is often considered one of the causes of worldwide depression of the 1930s. and Canada in the last days of George H. the general movement is now away from tariffs and quotas. continues in effect today. The General Agreement on Tariffs and Trades (GATT).  Doha Development Agenda: an initiative of the WTO focused on issues of trade and . W. tariff law of the 1930’s which set the highest tariff in  The World Trade Organization (WTO) was set up by GATT to act as a negotiating forum for trade disputes across countries. history (60 percent). bush administration in 1992. Also important are the U.

Finland. Lithuania. Bulgaria. Netherlands. and the ability to work well as a bloc will make the EU the most powerful player in the international market place in the coming decades. Germany. Spain. Ireland. Poland. Italy. Denmark. Slovenia. Slovakia. Cyprus. Portugal. Belgium. Sweden and the United Kingdom.  The European Union (EU) is a free-trade bloc composed of 27 nations: Austria. a reunited Germany. Economic Integration: Occurs when two or more nations join to form a free-trade zone. Czech Republic. France. . Luxembourg. Hungary. Greece. Latvia. Malta. Many economist believe that the advantage of free trade within the bloc. Romania. Estonia.

that foreign competition results in a loss of domestic jobs. the theory of comparative advantage is the case for free trade. most economies favour free trades . and force consumers to pay higher prices for protected products than they would otherwise pay. This adjustment process is far from costless however. push it to adopt relatively inefficient production techniques.Free Trade or Protection?  In one sense.  The case for protection rests on a number of propositions. but there is no reasons to believe that the workers laid off in the contracting sectors will not be ultimately reemployed in other expanding sectors. Despite these arguments. discourage dependency. one of which is  Other arguments for protection hold that cheap foreign labour makes competition unfair. that some countries engage in unfair trade practices. that free trade might harm the environment. and that protection safeguards the national security. Trade barriers prevent a nation from reaping the benefits of specialization. and shields infant industries.

Sign up to vote on this title
UsefulNot useful