Chapter 5. International Trade

Link to syllabus

Skip the technical treatment of comparative advantage (pp. 130-134), and the discussions of consumer and producer surplus (pp. 138-141), and Figure 5-11 p. 146.

Figure 5.1 P. 128. The Growing Importance of International Trade for the US

Description of the Theory of Comparative Advantage

• The theory says that free trade is the best policy• Countries can maximize their ‘consumption’ (availability

of goods and services), because…• They maximize their production, producing those things at

which they are most efficient (their comparative advantage), and

• Theory assumes full employment

• Theory ignores distribution of benefits inside the country – that’s another issue

Sources of Comparative Advantage (pp. 135-36)

• Climate, availability of natural resources (oil)• Relative amounts of capital and labor – (Heckscher-Ohlin)• Technology• Note also the potential importance of returns to scale. Curiously, although Krugman became famous for his work on this topic, ‘strategic trade policy’ isn’t mentioned in his intro

text.

In addition, this model leads to the prediction that trade policies will affect the distribution of income.

Figure 5-4, p. 137. Education, Skill Intensity, and Trade

Germany exports skill intensive products to the US, whileBangladesh exports low-skill products; just as theory ofComparative advantage predicts.

Figure 5-10 p. 145. The Effects of Creating a Tariff; – initial situation is free trade at Pw.

This graph usually appears on the exam.We will skip the discussion of Figure 5-11, p. 146.

Arguments for Protection

• National security• Jobs• Infant industry

• Or, straightforward Income Distribution – help one group, don’t worry about hurting another.

U.S. Tariff rates, 1860-2005

Different textbook

New Europe Map: NYT Oct. 21, 2002

Map of Canada

Mexico map