International Trade and Comparative Advantages PDF

INTERNATIONAL TRADE AND COMPARATIVE ADVANTAGES  Globalization, a term used to describe closer economic ties between countries, is primarily driven by international trade in goods and services. Despite its perceived novelty, it is transforming the way people think and live on a gl...

INTERNATIONAL TRADE AND COMPARATIVE ADVANTAGES  Globalization, a term used to describe closer economic ties between countries, is primarily driven by international trade in goods and services. Despite its perceived novelty, it is transforming the way people think and live on a global scale, thanks to advances in transportation, telecommunications, and international relations. Why Trade? International versus Intranational Trade The Principle of Comparative Advantage The Arithmetic of Comparative Advantage Tariffs, Quotas, and Other Interferences with Trade Why Inhibit Trade? Can Cheap Imports Hert a Country the main reason why nations trade with one another is to exploit the many advantages of specialization, Even if countries had all the resources they needed, other differences in natural endowments such as climate, terrain, and so on would lead them to engage in trade.  For centuries, people believed that one nation gains from trade at the expense of another. This belief led to attitudes that encourage each country to exploit its trading partners. The fallacy is that one nation's gain must be another's loss.  INTERNATIONAL VERSUS INTRANATIONAL TRADE International Trade: The exchange of goods, services, and capital between countries. Intranational Trade: Trade conducted within the borders of a single country, often between different regions or states.  POLITICAL FACTORS IN INTERNATIONAL TRADE Political factors in international trade refer to the influence of a country's government, policies, and political environment on the flow of goods, services, and investments across national borders. These factors include trade policies, diplomatic relations, political stability, regulatory frameworks, and national security concerns, which can either facilitate or restrict international trade.  The many currencies involved in international trade refer to the use of different national currencies by countries participating in global commerce. Because each country typically has its own currency (e.g., USD, Euro, Yen), international trade requires currency exchange, influenced by factors such as exchange rates, currency stability, and market demand. This complexity affects pricing, payment, and the overall profitability of transactions in the global marketplace.  IMPEDIMENTS TO MOBILITY OF LABOR AND CAPITAL Labor and capital mobility is easier within a country than between nations. Job opportunities can be easily pursued if jobs are scarce in one country. Personal costs of moving and leaving familiar surroundings can discourage mobility. Immigration quotas, employment restrictions, and language learning do not hinder relocations. IMPEDIMENTS TO MOBILITY OF LABOR AND CAPITAL There are also greater impediments to the transfer of capital across national boundaries than to its movement within a country. In some countries, foreign investment is also subject to special political risks, such as the danger of outright expropriation or nationalization after a change in government. IMPEDIMENTS TO MOBILITY OF LABOR AND CAPITAL Even if nothing as extreme as expropriation occurs, capital invested abroad faces significant risks from exchange rate variations. An investment valued at 250 million yen is worth $2.5 million to American investors when the dollar is worth 100 yen, but it is worth only $1 million when it takes 250 yen to buy a dollar.  ABSOLUTE ADVANTAGE: COMPARATIVE ADVANTAGE: THE ABILITY OF A THE ABILITY OF A COUNTRY, INDIVIDUAL, OR COUNTRY, INDIVIDUAL, ENTITY TO PRODUCE MORE OR ENTITY TO PRODUCE OF A GOOD OR SERVICE A GOOD OR SERVICE THAN COMPETITORS USING AT A LOWER THE SAME AMOUNT OF OPPORTUNITY COST RESOURCES. THAN COMPETITORS. A PRODUCER (INDIVIDUAL, FIRM A PRODUCER (INDIVIDUAL, OR A COUNTRY) HAS AN FIRM OR A COUNTRY) HAS AN ABSOLUTE ADVANTAGE OVER COMPARATIVE ADVANTAGE ANOTHER PRODUCER IN THE OVER ANOTHER PRODUCER PRODUCTION OF SOME GOOD IN THE PRODUCTION OF IF IT CAN PRODUCE MORE OF SOME GOOD IF THEY HAVE A THAT GOOD USING THE SAME RESOURCES (OR THE SAME LOWER OPPORTUNITY COST AMOUNT OF THAT GOOD USING OF PRODUCING THAT GOOD FEWER RESOURCES) THAN THE OTHER PRODUCER OPPORTUNITY COST: THE VALUE OF WHAT IS FOREGONE TO PRODUCE A GOOD OR SERVICE. MUTUAL BENEFIT: EVEN IF ONE COUNTRY IS MORE EFFICIENT (HAS AN ABSOLUTE ADVANTAGE) IN PRODUCING ALL GOODS, TRADE IS STILL BENEFICIAL IF EACH COUNTRY SPECIALIZES BASED ON COMPARATIVE ADVANTAGE. SPECIALIZATION AND TRADE: SPECIALIZATION ALLOWS COUNTRIES TO FOCUS RESOURCES ON AREAS OF STRENGTH, BOOSTING PRODUCTIVITY AND GLOBAL TRADE.  THE ARITHMETIC OF COMPARATIVE ADVANTAGES refers to the economic principle that countries or entities can benefit from trade by specializing in producing goods for which they have a comparative advantage, even if they are not the most efficient producers (i.e., they do not have an absolute advantage) in producing those goods. ALTERNATIVE OUTPUTS FROM ONE YEAR OF LABOR INPUT UNITED STATES JAPAN COMPUTERS 50 10 TELEVISIONS 50 40  EXAMPLES OF THE GAIN FROM TRADE UNITED STATES JAPAN TOTAL COMPUTERS +25,000 -10,000 +15,000 TELEVISIONS -25,000 +40,000 +15,000  THE GRAPHICS OF COMPARATIVE ADVANTAGES The graphic of comparative advantages is a visual representation that uses Production Possibility Frontiers (PPFs) to show how two countries or entities can benefit from specialization and trade. These graphics highlight the concept of opportunity costs and how trade enables both parties to consume beyond their own production limits.  tariffs, qoutas, and other interference with trade TARIFFS, QUOTAS, AND OTHER TRADE BARRIERS ARE TOOLS THAT GOVERNMENTS USE TO REGULATE INTERNATIONAL TRADE. THESE MEASURES CAN PROTECT DOMESTIC INDUSTRIES, GENERATE REVENUE, OR ADDRESS POLITICAL AND ECONOMIC GOALS, BUT THEY ALSO INTERFERE WITH THE FREE FLOW OF GOODS AND SERVICES, OFTEN LEADING TO INEFFICIENCIES AND RETALIATION. MERCANTILISM IS A DOCTRINE THAT HOLDS THAT EXPORTS ARE GOOD FOR THE COUNTRY, WHEREAS IMPORTS ARE HARMFUL TARIFF IS A TAX ON IMPORTS QOUTA SPECIFIES THE MAXIMUM AMOUNT OF A GOOD THAT IS PERMITTED INTO THE COUNTRY FROM ABROAD PER UNIT OF TIME EXPORT SUBSIDY A PAYMENT BY THE GOVERNMENT TO EXPORTERS TO PERMIT THEM TO REDUCE THE SELLING PRICES OF THEIR GOODS SO THEY CAN COMPETE MORE EFFECTIVELY IN FOREIGN MARKETS  tariffs vs. qouta Quotas Tariffs A limit on how much of a good can be A tax on imported goods. imported. Makes imports more Once the limit is reached, no more expensive, so people buy imports are allowed, even if people fewer of them. want to buy more. Government earns money Doesn’t directly make money for the from the tax. government, but it can create Example: If an imported car shortages and raise prices. has a $1,000 tariff, its price Example: Only 50,000 imported cars goes up by $1,000. are allowed in a year, so people might pay more for them. Key Difference: Tariffs change the tariffs vs. price of imports but qouta allow unlimited quantities. Quotas control the quantity but don’t directly affect price (though prices often go up due to limited supply).  WHY inhibit trade Countries may inhibit trade (limit trade) for several simple reasons: 1. Protect local jobs: If too many foreign goods flood the market, local businesses might struggle, and jobs could be lost. 2. Support young industries: New businesses or industries might need time to grow and become competitive, so restrictions can help them develop. 3. National security: Some products, like weapons or sensitive technology, are kept under control to prevent them from falling into the wrong hands.  WHY inhibit trade Countries may inhibit trade (limit trade) for several simple reasons: 4. Control quality: Governments may want to ensure that imported goods meet certain health or safety standards to protect consumers. 5. Balance trade: Sometimes, countries impose limits to try to reduce their trade deficit or protect their economy from too many imports.  the government has set up TRADE ADJUSTMENTS INFANT-INDUSTRY ASSISTANCE ARGUMENT provides special unemployment for trsde protection holds benefits, loans, retraining that new industries need to programs, and other aid to be protected from foreign workers and firms that are competition until they harmed by foreign competition develop and flourish  strategic trade policy Strategic trade policy refers to government actions aimed at improving the economic position of a country in certain industries, especially those that are key to long-term growth and global competitiveness. The idea behind strategic trade policy is to help domestic industries gain a competitive advantage in the global market, often through measures that target specific sectors. STRATEGIC ARGUMENT FOR PROTECTION HOLDS THAT NATION MAY SOMETIMES HAVE TO THREATEN PROTECTIONISM TO INDUCE OTHER COUNTRIES TO DROP THEIR OWN PROTECTIONIST MEASURES  IN SOME SITUATIONS, PROTECTIONISM CAN TEMPORARILY SAFEGUARD FREE TRADE BY ALLOWING COUNTRIES TO STRENGTHEN THEIR INDUSTRIES, ADDRESS UNFAIR PRACTICES, OR ENSURE NATIONAL CAN SECURITY. HOWEVER, IF USED PROTECTIONISM EXCESSIVELY OR FOR TOO LONG, SAVE FREE PROTECTIONISM CAN UNDERMINE THE BENEFITS OF FREE TRADE, SUCH AS LOWER TRADE? PRICES, GREATER VARIETY, AND OVERALL ECONOMIC GROWTH. IT’S ABOUT FINDING A BALANCE BETWEEN PROTECTIONIST POLICIES AND THE ADVANTAGES OF A MORE OPEN GLOBAL TRADE SYSTEM.  MEANS SELLING GOODS IN A FOREIGN MARKET AT LOWER DUMPING PRICE THAN THOSE CHARGED IN THE HOME MAKET  YES, CHEAP IMPORTS CAN HURT A COUNTRY IN CERTAIN SITUATIONS, EVEN THOUGH THEY MAY SEEM CAN CHEAP BENEFICIAL AT FIRST. WHILE CHEAP IMPORTS HURT IMPORTS OFTEN PROVIDE A COUNTRY? CONSUMERS WITH LOWER PRICES AND MORE VARIETY, THEY CAN HAVE NEGATIVE EFFECTS ON THE ECONOMY, ESPECIALLY IN THE LONG TERM.  WHILE CHEAP IMPORTS OFFER CONSUMERS LOWER PRICES, THEY CAN HAVE NEGATIVE LONG-TERM EFFECTS ON DOMESTIC INDUSTRIES, EMPLOYMENT, AND ECONOMIC STABILITY. GOVERNMENTS MAY INTERVENE WITH CAN CHEAP TRADE POLICIES (LIKE TARIFFS OR IMPORTS HURT SUBSIDIES) TO PROTECT VULNERABLE A COUNTRY? SECTORS OR TO ENSURE THAT THE ECONOMY REMAINS BALANCED AND RESILIENT. THE KEY IS FINDING A BALANCE BETWEEN BENEFITING FROM CHEAP IMPORTS AND PROTECTING DOMESTIC ECONOMIC INTERESTS. Thank You