Additional Information for International Trade

Why does International Trade Exist?

Because countries that trade are both better off.

Comparative Advantage

Two countries can both produce two goods. Each one can produce one of goods cheaper than the other. They produce at their lower opportunity cost – and trade freely.

Comparative advantage *they know they have comparative advantage

because individuals trying to earn profit – buying low- selling high.

What to Trade?

Countries specialize in the production of the good in which they have a comparative advantage.

The situation when a country can produce a good at lower opportunity cost than another country can.

For a tutorial on specialization and trade click the flags

What is protectionism?

• Establishing Import Bans• Establishing Import Quotas• Tariffs on Imports (often met with retaliation)• Closing the border to trade (protect our own)• Negative effects- no justification except for

infant industry protection.

Why Restrict Trade? National–Defense Argument – certain industries are

necessary to the national defense. Infant-Industry Argument – new industries often need

protection from older, established foreign firms. Antidumping Argument – foreign competitors will sell goods

at below cost of production so as to penetrate markets Low-Foreign-Wage Argument- Domestic producers pay high

wages to their workers and foreign producers pay low wages to their workers

Saving-Domestic-Jobs Argument – Foreign producers displace domestic workers.

What really is trade?

• If I write a book and use my income to buy a car made in Detroit, no one will question this transaction. I’m better off and the car manufacturer is better off.

• Two areas: (1) modern economy is built on trade, (2) we pay people to do things we don’t want to do.. Like buying coffee at Starbucks, getting our oil changed, painting our house,

Why Trade???

Think about your life without trade:1. You wake up early in small,drafty house that you

built yourself.2. Put on your clothes that you wove yourself from

shearing the sheep in your yard.3. Pluck a few coffee beans off a tree that does not

grow well in Wisconsin all the while hoping that your hen laid at least one egg overnight.

OUR STANDARD OF LIVING IS HIGH BECAUSE WE ARE ABLE TO FOCUS ON WHAT WE DO BEST AND TRADE FOR THE REST!

The U.S., when established, set up one very large trade zone… freely trading with other states.

When countries trade among themselves, the result can be the same… word “freely” is the culprit.

Bottom Line for Trade

1. Productivity is what makes us rich.

2. Specialization is what makes us productive.

3. Trade allows us to specialize

4 Ways government commonly interferes with trade

1. Protective tariffs. (are excise taxes or duties placed on imported goods)… Purpose. To “protect” shield domestic producers from foreign competition

4 Ways government commonly interferes with trade

1. Protective tariffs. (are excise taxes or duties placed on imported goods)… Purpose. To “protect” shield domestic producers from foreign competition

2. Import Quotas….A limit on the amount of any specified good

that can enter the country over a fixed period.

(example: Only X # of bottles of Cognac can be imported)

3. Nontariff barriers(Just a way around allowing imports into the

country by establishing standards that could not be complied with and yards of red tape to hassle with)… Countries will just forget trading with that country and go someplace else to trade.

4. Export SubsidiesGovernment pays (subsidies- gives dollars to)

domestic producers of export goods. This reduces their production costs, lowers their

taxes and allows producers to charge lower prices and sell more exports.

Legislation (Oct 2004) ceased most of this arrangement with Am companies… WTO sanctioned American trade for unfair subsidies, and Congress finally had to comply.

A Daily Occurrence