INTRODUCTION TO

INTERNATIONAL TRADEYudy Yunardy

GOALS

Reasons for Trade

Understanding Production Possibilities

Defining Absolute Advantage

Defining Comparative Advantage

Absolute Advantage Versus Comparative Advantage

Benefits of Specialization

Relationship Between Specialization and Trade

REASONS FOR TRADE

International trade is the exchange of capital, goods, and

services across international borders or territories.

Each nation should produce goods for which its domestic

opportunity costs are lower than the domestic opportunity costs

of other nations and exchange those goods for products that

have higher domestic opportunity costs compared to other nations.

Benefits of trade include lower prices and better products for

consumers, improved political ties among nations, and efficiency

gains for domestic producers.

UNDERSTANDING PRODUCTION

POSSIBILITIES

The production possibilities curve shows the maximum possible production level of one commodity for any production level of another, given the existing levels of the factors of production and the state of technology.

Points outside the production possibilities curve are unattainable with existing resources and technology if trade does not occur with an external producer.

Without trade, each country consumes only what it produces.However, because of specialization and trade, the absolute quantity of goods available for consumption is higher than the quantity that would be available under national economic self-sufficiency.

PRODUCTION POSSIBILITIES FRONTIER

DEFINING ABSOLUTE ADVANTAGE

A country that has an absolute advantage can produce a good

at lower marginal cost.

A country with an absolute advantage can sell the good for less

than the country that does not have the absolute advantage.

Absolute advantage differs from comparative advantage, which

refers to the ability to produce specific goods at a lower

opportunity cost.

DEFINING COMPARATIVE

ADVANTAGE

Even if one country has an absolute advantage in the production

of all goods, it can still benefit from trade.

Countries should import goods if the opportunity cost of importing

is lower than the cost of producing them locally.

Specialization according to comparative advantage results in a

more efficient allocation of world resources.A larger quantity of

outputs becomes available to the trading nations.

Competitive advantage is distinct from comparative advantage

because it has to do with distinguishing attributes which are not

necessarily related to a lower opportunity cost.

ABSOLUTE ADVANTAGE VERSUS

COMPARATIVE ADVANTAGE

The producer that requires a smaller quantity inputs to produce a

good is said to have an absolute advantage in producing that

good.

Comparative advantage refers to the ability of a party to

produce a particular good or service at a lower opportunity cost

than another.

The existence of a comparative advantage allows both parties to

benefit from trading, because each party will receive a good at

a price that is lower than its opportunity cost of producing that

good.

ABSOLUTE ADVANTAGE

Output per Day of Work

Food Clothing

Country A 6 3

Country B 1 2

BENEFITS OF SPECIALIZATION

Whenever countries have different opportunity costs in

production they can benefit from specialization and trade.

Benefits of specialization include greater economic efficiency,

consumer benefits, and opportunities for growth for competitive

sectors.

The disadvantages of specialization include threats to

uncompetitive sectors, the risk of over-specialization, and

strategic vulnerability.

RELATIONSHIP BETWEEN

SPECIALIZATION AND TRADE

Nations decide whether they should export or import goods

based on comparative advantages.

Generally, nations can consume more by specializing in a good

and trading it for other goods.

When countries decide which country will specialize in which

product, the essential question becomes who could produce the

product at a lower opportunity cost.

COMPARATIVE ADVANTAGE

Amounts produced in 12 hours

Ketchup Mustard

Bob 6 bottles 4 bottles

Tom 12 bottles 3 bottles

THE END

Questions?

QUIZ..

Oops!!!

International Trade

Which of the following is NOT a benefit from international

trade?

A) More choices for consumers

B) Increased comparative advantage

C) Improved returns to investment in research and development

D) Improved resource allocation

International Trade

What is the source of the net benefit from international

trade?

A) Comparative advantage

B) Technology spillovers

C) Maximization of consumption

D) Efficient levels of investment

International Trade

Imagine Russia exports lumber to Norway. Which of the

following describes the price that Norway pays for this

lumber?

A) It is above Russia's and Norway's opportunity cost of producing

lumber

B) It is above Russia's and below Norway's opportunity cost of

producing lumber

C) It is below Russia's and Norway's opportunity cost of producing

lumber

D) It is below Russia's and above Norway's opportunity cost of

producing lumber

International Trade

Which of these determines the location of the production

possibilities frontier?

A) Level of technology

B) Amount of raw materials available

C) All of these answers

D) Amount of labor available

International Trade

Fill in the blank. The gains from trade enables

_______________ the production possibility frontier.

A) Production outside

B) Consumption inside

C) Consumption outside

D) Production inside

International Trade

Complete the sentence with the most suitable pairs of

words: (1) is the only sustainable way to consume outside

the PPF curve and (2) allows us to shift the PPF curve outward

in the long run.

A) Efficiency (1); technology (2)

B) Efficiency (1); trade (2)

C) Trade (1); technology (2)

D) Technology (1); efficiency (2)

International Trade

Imagine Firm A has an absolute advantage in cereal

production over Firm B. If both firms are producing 10 boxes

of cereal an hour, what is true about the marginal cost of the

11th box of cereal?

A) The marginal cost is lower for firm B than firm A

B) The marginal cost is the same for both firms

C) The marginal cost is not related to absolute advantage

D) The marginal cost is lower for Firm A than Firm B

International Trade

Country A has a comparative advantage over Country B in

the production of corn if ____________.

A) the opportunity cost of producing corn is lowest in Country A

B) the opportunity cost of producing corn is highest in Country A

C) the marginal cost of producing corn is highest in Country A

D) the marginal cost of producing corn is lowest in Country A

International Trade

Which of the following statements best describes the

implications of comparative advantage?

A) Export goods if they can be produced at a cheaper cost

elsewhere

B) Import goods if the opportunity cost of importing is lower than

the cost of producing them locally

C) Import goods if they can be produced elsewhere

D) Export goods if the opportunity cost of exporting is lower than

the cost of producing them locally

International Trade

Economic efficiency occurs when all trading partners

_____________.

A) have the same level of marginal productivity

B) produce the item that they can sell at the lowest cost

C) specialize in the area(s) where they have a comparative

advantage

D) All of these answers

International Trade

Fill in the blank. For a country to have a comparative

advantage in producing good A against another country, it

should be able to produce A ______________.

A) With less labor

B) With less capital

C) At a lower opportunity cost

D) At a lower cost

International Trade

There are two goods (bread and shirts) and two factors of

production (labor and capital). Bread is capital-intensive,

while shirts are labor-intensive. Country A is abundant in

labor; Country B is abundant in capital. Under free trade,

which is true?

A) Country A will export shirts, while country B will export bread.

B) Country A will export bread, while country B will export shirts.

C) Country A will export both bread and shirts.

D) Country B will export both bread and shirts.

International Trade

What is the difference between absolute advantage?

A) A country can have a comparative advantage even if it does

not have an absolute advantage.

B) Absolute advantage is necessary for trade, while comparative

advantage is not.

C) Countries with a comparative advantage must have an

absolute advantage, but not vis versa.

D) None of these answers.

International Trade

Which one of the following is a benefit of specialization?

A) Countries can take advantage of economies of scale.

B) Consumers benefit from lower prices since goods are produced

more efficiently.

C) Countries can trade for the good in which they do not have a

comparative advantage.

D) All of these answers.

International Trade

What do countries consider when deciding to specialize?

A) Their absolute advantage

B) Their level of economic development

C) Their comparative advantage

D) Their level of efficiency