Chapter 8

International Trade
Goods and services purchased from other countries are
imports; goods and services sold to other countries are
exports.

Globalization is the phenomenon of growing economic

linkages among countries.

International trade, like trade among individuals, arises

from comparative advantage: the opportunity cost of
producing an additional unit of a good is lower in some
countries than in others.
 Trade and comparative advantage: a quick review comparative advantage = low
opportunity cost of production
a country with a comparative advantage in producing something…
* will tend to specialize in producing it, and
* will trade with other countries for other things
at which it does not have a comparative advantage

e.g., US has comparative advantage producing planes,

Mexico has comparative advantage producing auto parts

US: opp. cost of 1 auto parts = 2 planes, Mexico: opp. cost of 1 auto parts = 0.5 planes,
opp. cost of 1 plane = 0.50 auto parts opp. cost of 1 plane = 2 auto parts
So US has lower opportunity cost of producing planes,
Mexico has lower opportunity cost of producing auto
parts
 So Mexico will offer auto parts in exchange for planes from the
US, the US will offer planes in exchange for auto parts from
Mexico.

“Rate of exchange” of parts for planes (and vice-versa)

has to be advantageous to both parties in the transaction:
to give up one plane, US will want to get more than 0.5 parts,
to give up one parts, Mexico will want to get more than 0.5 plane
 “Autarky” = without trade
Columns “with trade” assume that trade occurs at the rate
of one plane for each one bundle of auto parts.

With trade, US makes 2000 planes, keeps 1250,

and sells the remaining 750 to Mexico for 750 parts. So
US is able to consume 750 parts and 1250 planes.

With trade, Mexico makes 2000 parts, keeps 1250,

and sells the remaining 750 parts to Mexico for 750 planes.
So Mexico can consume 1250 parts and 750 planes.

As a result, both US and Mexico can go beyond

their production-possibility frontiers!
Figure 8.3 The Gains from International Trade
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Sources of Comparative Advantage

Differences in Climate
Differences in Factor Endowments
Differences in Technology
The Effects of Imports

The domestic demand curve shows how the quantity of a good

demanded by domestic consumers depends on the price of that
good.

The domestic supply curve shows how the quantity of a good

supplied by domestic producers depends on the price of that
good.

The world price of a good is the price at which that good can be
bought or sold abroad.