International Trade Concepts

Study Notes

International Trade and Comparative Advantage

Countries trade because they cannot produce everything they need domestically, and trade allows them to specialize and conserve resources.
There are two types of advantage: Absolute Advantage and Comparative Advantage.

Absolute Advantage

Absolute Advantage: a condition where one country or business can produce more than another using the same amount of resources.
Example: Country A can produce 1 million gallons of milk per year, while Country X can only produce ½ million gallons of milk per year.
Absolute Advantage can occur at the individual/firm level as well.

Comparative Advantage

Comparative Advantage: a condition where one country or business can produce a good or service at a lower opportunity cost than another.
Example: Country X can produce ½ million gallons of milk per year at $1 per gallon, while Country A can produce 1 million gallons of milk per year at $1.25 per gallon.
Comparative Advantage can occur at the individual/firm level as well.

Distinguishing between Absolute and Comparative Advantage

Distinguishing between Absolute and Comparative Advantage involves understanding the opportunity costs of production.

Specialization and Trade

Specialization and trade can lead to increased efficiencies, production, consumption, and satisfaction.
Countries specialize in producing goods and services that require a great deal of human and physical capital, while others specialize in manufacturing products that require low-skilled labor.

Balance of Trade and Balance of Payments

Balance of Trade: the value of all goods and services exported minus the value of all goods and services imported.
Trade Surplus: when exports exceed imports.
Trade Deficit: when imports exceed exports.
Balance of Payments: a country's record of all monetary transactions in each sector (public and private) of the international market.

Gains from Trade

Specialization and trade can lead to increased gains from trade for two or more nations.
Comparative advantage increases the gains from trade for two or more nations.

Personal Benefits from Trade

Individuals can personally benefit from gains from trade, such as having access to a wider variety of goods and services.

Description

This quiz covers key concepts of international trade, including advantages, goods, services, balance of trade, balance of payments, and more. Test your knowledge of why countries trade and the benefits and consequences of trade.