Professional Documents
Culture Documents
CH 20
CH 20
20
International Trade,
Comparative Advantage,
and Protectionism
Prepared by: Fernando Quijano
and Yvonn Quijano
International Trade
International Trade
The internationalization or
globalization of the U.S. economy
has occurred in the private and
public sectors, in input and output
markets, and in business firms and
households.
+ 0.4
+ 0.1
0.9
+ 0.4
+ 2.4
+ 3.9
+ 1.2
+ 13.6
2.3
23.7
26.1
24.0
14.9
15.0
20.5
51.7
102.0
114.2
131.9
142.3
106.3
80.7
71.4
20.7
27.9
60.5
87.1
84.3
89.0
89.3
151.7
249.9
365.5
348.9
423.6
Absolute Advantage
versus Comparative Advantage
A country enjoys an absolute
advantage over another country in
the production of a product when it
uses fewer resources to produce that
product than the other country does.
Absolute Advantage
versus Comparative Advantage
A country enjoys a comparative
advantage in the production of a
good when that good can be
produced at a lower cost in terms of
other goods.
AUSTRALIA
Wheat
6 bushels
2 bushels
Cotton
2 bales
6 bales
AUSTRALIA
Wheat
25 acres x 6 bushels/acre
150 bushels
75 acres x 2 bushels/acre
150 bushels
Cotton
75 acres x 2 bales/acre
150 bales
25 acres x 6 bales/acre
150 bales
PRODUCTION
New Zealand
Wheat
Cotton
Australia
0 acres
0
CONSUMPTION
New
Zealand
Australia
300 bushels
300 bushels
300 bales
300 bales
NEW ZEALAND
AUSTRALIA
6 bushels
1 bushel
6 bales
3 bales
Wheat
Cotton
NEW ZEALAND
AUSTRALIA
50 acres x 6 bushels/acre
300 bushels
75 acres x 1 bushels/acre
75 bushels
50 acres x 6 bales/acre
300 bales
25 acres x 3 bales/acre
75 bales
Wheat
Cotton
New Zealand
Australia
50 acres x 6 bushels/acre
300 bushels
0 acres
0
50 acres x 6 bales/acre
300 bales
Wheat
Cotton
New Zealand
Australia
75 acres x 6 bushels/acre
450 bushels
0 acres
0
25 acres x 6 bales/acre
150 bales
Australia
Wheat
350 bushels
100 bushels
(after trade)
200 bales (trade)
Cotton
350 bales
100 bales
(after trade)
Comparative Advantage
Means Lower Opportunity Cost
Both Australia and New Zealand will gain when the terms
of trade are set between 1:1 and 3:1, cotton to wheat.
Terms of Trade
The ratio at which a country can
trade domestic products for imported
products is the terms of trade.
The terms of trade determine how
the gains from trade are distributed
among trading partners.
Exchange Rates
When trade is freeunimpeded by
government-instituted barriers
patterns of trade and trade flows
result from the independent
decisions of thousands of importers
and exporters and millions of private
households and firms.
To understand these patterns we
must learn about exchange rates.
Exchange Rates
An exchange rate is the ratio at
which two currencies are traded, or
the price of one currency in terms of
another.
For any pair of countries, there is a
range of exchange rates that can lead
automatically to both countries
realizing the gains from specialization
and comparative advantage.
BRAZIL
Timber
$1
3 Reals
Rolled steel
$2
4 Reals
PRICE
OF REAL
$1 = 1 R
$1.00
$1 = 2 R
.50
$1 = 2.1 R
.48
$1 = 2.9 R
.34
$1 = 3 R
.33
$1 = 4 R
.25
RESULT
Exchange Rates
and Comparative Advantage
If exchange rates end up in the right
ranges, the free market will drive
each country to shift resources into
those sectors in which it enjoys a
comparative advantage.
Only those products in which a
country has a comparative
advantage will be competitive in
world markets.
The Sources of
Comparative Advantage
Factor endowments refer to the
quantity and quality of labor, land,
and natural resources of a country.
Factor endowments seem to explain
a significant portion of actual world
trade patterns.
Economic Integration
Economic integration occurs when
two or more nations join to form a
free-trade zone.
The European Union (EU) and the
North American Free-Trade
Agreement NAFTA are examples of
economic integration.
Economic Integration
The European Union (EU) is the
European trading bloc composed of
Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland,
Italy, Luxembourg, the Netherlands,
Portugal, Spain, Sweden, and the
United Kingdom.
Economic Integration
The U.S.-Canadian Free-Trade
Agreement is an agreement in
which the United States and Canada
agreed to eliminate all barriers to
trade between the two countries by
1988.
Economic Integration
The North American Free-Trade
Agreement (NAFTA) is an
agreement signed by the United
States, Mexico, and Canada in which
the three countries agreed to
establish all of North America as a
free-trade zone.
theorem
economic integration
infant industry
exchange rate
export subsidies
protection
factor endowments
quota
theory of comparative
advantage
trade deficit
trade surplus
U.S.-Canadian FreeTrade Agreement