Ch19 International Trade, Comparative Advantage, And Protectionism

7/25/2019 Ch19 International Trade, Comparative Advantage, And Protectionism

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2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air

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Prepared by: FernandoPrepared by: Fernando

Quijano and Yvonn QuijanoQuijano and Yvonn Quijano

International Trade,International Trade,Comparative Advantage, andComparative Advantage, and

ProtectionismProtectionism


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$nternational %ra&e$nternational %ra&e

' (ll economies, regar&less of their si)e,(ll economies, regar&less of their si)e,

&epen& to some e*tent on other&epen& to some e*tent on other

economies an& are affecte& b e+entseconomies an& are affecte& b e+ents

outsi&e their bor&ersoutsi&e their bor&ers

' %he -internationali)ation. or -globali)ation.%he -internationali)ation. or -globali)ation.

of the econom has occurre& in theof the econom has occurre& in the

pri+ate an& public sectors, in input an&pri+ate an& public sectors, in input an&output mar1ets, an& in business firms an&output mar1ets, an& in business firms an&

househol&shousehol&s


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(bsolute (&+antage ersus(bsolute (&+antage ersus

Comparati+e (&+antageComparati+e (&+antage

' ( countr en3os an( countr en3os an absolute advantageabsolute advantage

o+er another countr in the pro&uction of ao+er another countr in the pro&uction of a

pro&uct if it uses fe4er resources to pro&ucepro&uct if it uses fe4er resources to pro&uce

that pro&uct than the other countr &oesthat pro&uct than the other countr &oes

' ( countr en3os a( countr en3os a comparative advantagecomparative advantage

in the pro&uction of a goo& if that goo& canin the pro&uction of a goo& if that goo& can

be pro&uce& at a lo4er costbe pro&uce& at a lo4er cost in terms ofin terms ofother goodsother goods


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5ains from Comparati+e (&+antage5ains from Comparati+e (&+antage

' E+en if a countr ha& a consi&erableE+en if a countr ha& a consi&erable

absolute a&+antage in the pro&uction ofabsolute a&+antage in the pro&uction of

both goo&s, Ricar&o 4oul& argue thatboth goo&s, Ricar&o 4oul& argue that

specialization and trade are still mutuallyspecialization and trade are still mutuallybeneficialbeneficial

' hen countries speciali)e in pro&ucing thehen countries speciali)e in pro&ucing the

goo&s in 4hich the ha+e a comparati+egoo&s in 4hich the ha+e a comparati+ea&+antage, the ma*imi)e their combine&a&+antage, the ma*imi)e their combine&

output an& allocate their resources moreoutput an& allocate their resources more

efficientlefficientl


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E*change RatesE*change Rates

' hen tra&e is free7unimpe&e& bhen tra&e is free7unimpe&e& b

go+ernment8institute& barriers7patterns ofgo+ernment8institute& barriers7patterns of

tra&e an& tra&e flo4s result from thetra&e an& tra&e flo4s result from the

in&epen&ent &ecisions of thousan&s ofin&epen&ent &ecisions of thousan&s ofimporters an& e*porters an& millions ofimporters an& e*porters an& millions of

pri+ate househol&s an& firmspri+ate househol&s an& firms

' %o un&erstan& these patterns 4e must%o un&erstan& these patterns 4e must1no4 something about the factors that1no4 something about the factors that

&etermine e*change rates&etermine e*change rates


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E*change RatesE*change Rates

' (n(n exchange rateexchange rateis the ratio at 4hich t4ois the ratio at 4hich t4o

currencies are tra&e& %he price of onecurrencies are tra&e& %he price of one

currenc in terms of anothercurrenc in terms of another

' !or an pair of countries, there is a range of!or an pair of countries, there is a range of

e*change rates that can lea& automaticalle*change rates that can lea& automaticall

to both countries reali)ing the gains fromto both countries reali)ing the gains from

speciali)ation an& comparati+e a&+antagespeciali)ation an& comparati+e a&+antage

' E*change rates &etermine the terms ofE*change rates &etermine the terms of

tra&etra&e


7/10 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air

%he ources of%he ources of

Comparati+e (&+antageComparati+e (&+antage

' Factor endowmentsFactor endowmentsrefer to the 9uantitrefer to the 9uantit

an& 9ualit of labor, lan&, an& naturalan& 9ualit of labor, lan&, an& natural

resources of a countrresources of a countr

' !actor en&o4ments seem to e*plain a!actor en&o4ments seem to e*plain a

significant portion of actual 4orl& tra&esignificant portion of actual 4orl& tra&e

patternspatterns



%ra&e Barriers: %ariffs,%ra&e Barriers: %ariffs,

E*port ubsi&ies, an& ;uotasE*port ubsi&ies, an& ;uotas

' ProtectionProtectionis the practice of shiel&ing ais the practice of shiel&ing a

sector of the econom from foreignsector of the econom from foreign

competitioncompetition

' (( tarifftariffis a ta* on importsis a ta* on imports

' Export subsidiesExport subsidiesare go+ernment pamentsare go+ernment paments

ma&e to &omestic firms to encourage e*portsma&e to &omestic firms to encourage e*ports

Closel relate& to subsi&ies isClosel relate& to subsi&ies is dumpingdumping ( (firm or in&ustr sells pro&ucts on the 4orl&firm or in&ustr sells pro&ucts on the 4orl&

mar1et at prices belo4 the cost of pro&uctionmar1et at prices belo4 the cost of pro&uction

' (( quotaquotais a limit on the 9uantit of importsis a limit on the 9uantit of imports



%he Case for !ree %ra&e%he Case for !ree %ra&e

' %he case for free tra&e is base& on the%he case for free tra&e is base& on the

theor of comparati+e a&+antage hentheor of comparati+e a&+antage hen

countries speciali)e an& tra&e base& oncountries speciali)e an& tra&e base& on

comparati+e a&+antage, consumers pacomparati+e a&+antage, consumers paless an& consume more, an& resourcesless an& consume more, an& resources

are use& more efficientlare use& more efficientl

' hen tariffs an& 9uotas are impose&,hen tariffs an& 9uotas are impose&,some of the gains from tra&e are lostsome of the gains from tra&e are lost



%he Case for Protection%he Case for Protection

' Protection sa+es 3obsProtection sa+es 3obs

' ome countries engage in unfair tra&eome countries engage in unfair tra&e

practicespractices

' Cheap foreign labor ma1es competitionCheap foreign labor ma1es competition

unfairunfair

' Protection safeguar&s national securitProtection safeguar&s national securit

' Protection &iscourages &epen&encProtection &iscourages &epen&enc

' Protection safeguar&s infant in&ustriesProtection safeguar&s infant in&ustries

Ch19 International Trade, Comparative Advantage, And Protectionism

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