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Comparative advantage is the ability of a country to produce goods than other countries. Even though
others might be able to produce it but you are better than those. Second the opportunity cost of the
country with a comparative advantage is lower. Comparative advantage theory says that to be efficient
the country should produce those goods in which it has cooperative advantage while import the other
goods.

On the other hand the theory of absolute advantage does not in cooperate the theory of opportunity costs.
If you give the same resources to all the countries the one that produces the highest number of goods ha
has the absolute advantage

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 Party A can produce 5 widgets per hour with 3 employees.

 Party B can produce 10 widgets per hour with 3 employees.

Assuming that the employees of both parties are paid equally, Party B has an absolute advantage over
Party A in producing widgets per hour. This is because Party B can produce twice as many widgets as
Party A can with the same number of employees.
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 Country A can produce 1000 parts per hour with 200 workers.
 Country B can produce 2500 parts per hour with 200 workers.
 Country C can produce 10000 parts per hour with 200 workers.

Considering that labor and material costs are all equivalent, Country C has the absolute advantage over
both Country B and Country A because it can produce the most parts per hour at the same cost as other
nations. Country B has an absolute advantage over Country A because it can produce more parts per
hour with the same number of employees. Country A has no absolute advantage because it can't produce
more goods than either Country B or Country C given the same input.



  










 


Protectionism is the economic policy of restraining trade between states through methods such as tariffs
on imported goods, restrictive quotas, and a variety of other government regulations designed to
discourage imports and prevent foreign take-over of domestic markets and companies.

This policy contrasts with free trade, where government barriers to trade and movement of capital are
kept to a minimum. In recent years, it has become closely aligned with anti-globalization. The term is
mostly used in the context of economics, where protectionism refers to policies or doctrines which protect
businesses and workers within a country by restricting or regulating trade with foreign nations.

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u Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually vary according to
the type of goods imported. Import tariffs will increase the cost to importers, and increase the price of
imported goods in the local markets, thus lowering the quantity of goods imported. Tariffs may also be
imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as
import tariffs. However, since export tariffs are often perceived as 'hurting' local industries, while import
tariffs are perceived as 'helping' local industries, export tariffs are seldom implemented.

À 
u To reduce the quantity and therefore increase the market price of imported goods. The
economic effects of an import quota is similar to that of a tariff, except that the tax revenue gain from a
tariff will instead be distributed to those who receive import licenses. Economists often suggest that
import licenses be auctioned to the highest bidder, or that import quotas be replaced by an equivalent
tariff.

 
u Countries are sometimes accused of using their various administrative rules
(e.g. regarding food safety, environmental standards, electrical safety, etc.) as a way to introduce barriers
to imports.

 
 Supporters of anti-dumping laws argue that they prevent "dumping" of cheaper
foreign goods that would cause local firms to close down. However, in practice, anti-dumping laws are
usually used to impose trade tariffs on foreign exporters.


 u Government subsidies (in the form of lump-sum payments or cheap loans) are
sometimes given to local firms that cannot compete well against foreign imports. These subsidies are
purported to "protect" local jobs, and to help local firms adjust to the world markets.

{ 
 u Export subsidies are often used by governments to increase exports. Export subsidies
are the opposite of export tariffs, exporters are paid a percentage of the value of their exports. Export
subsidies increase the amount of trade, and in a country with floating exchange rates, have effects similar
to import subsidies.

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u A government may intervene in the foreign exchange market to lower the
value of its currency by selling its currency in the foreign exchange market. Doing so will raise the cost of
imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a
policy is only effective in the short run, as it will most likely lead to inflation in the country, which will in turn
raise the cost of exports, and reduce the relative price of imports.

À

  There is an argument for viewing national patent systems as a cloak for
protectionist trade policies at a national level. Two strands of this argument existu one when patents held
by one country form part of a system of exploitable relative advantage in trade negotiations against
another, and a second where adhering to a worldwide system of patents confers "good citizenship" status
despite 'de facto protectionism'. Peter Drahos explains that "States realized that patent systems could be
used to cloak protectionist strategies. There were also reputational advantages for states to be seen to be
sticking to intellectual property systems. One could attend the various revisions of the Paris and Berne
conventions, participate in the cosmopolitan moral dialogue about the need to protect the fruits of
authorial labor and inventive genius...knowing all the while that one's domestic intellectual property
system was a handy protectionist weapon."

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A market is defined as a group of buyers and sellers of a particular product or service. Competitive
markets are markets with many buyers and sellers, so that each has a very small influence on the price.
Supply and demand is the most useful model for a competitive market, and shows how buyers (citizens)
and sellers (businesses) interact in that market.


 
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The demand for a product is the amount that buyers are willing and able to purchase. Quantity demanded
is the demand at a particular price, and is represented as the demand curve. The supply of a product is
the amount that producers are willing and able to bring to the market for sale. Quantity supplied is the
amount offered for sale at a particular price. The main determinant of supply/demand is the price of the
product.

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The Law of Demand states that other things held constant, as the price of a good increases, the quantity
demanded will fall. Other factors that can influence demand includeu

Income - Generally, as income increases, we are able to buy more of most goods. When demand for a
good increases when incomes increase, we call that good a "normal good". When demand for a good
decreases when incomes increase, then that good is called an inferior good.

Price of related products - Related goods come in two types, the first of which are "substitutes".
Substitutes are similar products that can be used as alternatives. Examples of substitute goods are
Coke/Pepsi, and butter/margarine. Usually, people substitute away to the less expensive good. Other
related products are classified as "complements". Complements are products that are used in conjunction
with each other. Examples of complements are pencil/eraser, left/right shoes, and coffee/sugar.

Tastes and preferences - Tastes are a major determinant of the demand for products, but usually does
not change much in the short run.

Expectations - When you expect the price of a good to go up in the future, you tend to increase your
demand today. This is another example of the rule of substitution, since you are substituting away from
the expected relatively more expensive future consumption.

 
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Demand curves isolate the relationship between quantity demanded and the price of the product, while
holding all other influences constant (in latinu ceteris paribus). These curves show how many of a product
will be purchased at different prices. Note that demand is represented by the entire curve, not just one
point on the curve, and represents all the possible price-quantity choices given the ceteris paribus
assumptions. When the price of the product changes, quantity demanded changes, but demand does not
change. Price changes involve a movement along the existing demand curve.

Market demand is the summation of all the individual demand curves of those in the market. It is the
horizontal sum of individual curves and add up all the quantities demanded at each price. The main

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interest is in market demand curves, because they are averages of individual behaviour tend to be well-
behaved.

When any influence other than the price of the product changes, such as income or tastes, demand
changes, and the entire demand curve will shift (either upward or downward). A shift to the right (and up)
is called an increase in demand, while a shift to the left (and down) is called a decrease in demand. In
example, there are two ways to discourage smokingu raise the price through taxes or; make the taste less
desirable.

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As the price of a product rises, ceteris paribus, suppliers will offer more for sale. This implies that price
and quantity supplied are positively related. The major factor that influences supply is the "cost of
production", and includesu

Input prices - As the prices of inputs such as labour, raw materials, and capital increase, production tends
to be less profitable, and less will be produced. This leads to a decrease in supply.

Technology - Technology relates to methods of transforming inputs into outputs. Improvements in

technology will reduce the costs of production and make sales more profitable so it tends to increase the
supply.

Expectations - If firms expect prices to rise in the future, may try to product less now and more later.

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The relationship between the price of a product and the quantity supplied, holding all other things
constant is generally sloping upwards. Supply is represented by the entire curve and not just one point on
the curve. When the price of the product changes, the quantity supplied changes, but supply does not
change. When cost of production changes, supply changes, and the entire supply curve will shift.

Market Supply is the summation of all the individual supply curves, and is the horizontal sum of individual
supply curves. It is influenced by the factors that determine individual supply curves, such as cost of
production, plus the number of suppliers in the market. In general, the more firms producing a product,
the greater the market supply.

When quantity supplied at a given price decreases, the whole curve shifts to the left as there is a
decrease in supply. This is generally caused by an increase in the cost of production or decrease in the
number of sellers. An increase in wages, cost of raw materials, cost of capital, ceteris paribus, will
decrease supply. Sometimes weather may also affect supply, if the raw materials are perishable or
unattainable due to transportation problems.

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We can analyze how markets behave by matching (or combining) the supply and demand curves.
Equilibrium is defined as the intersection of supply and demand curves. The equilibrium price is the price
where the quantity demanded matches the quantity supplied. The equilibrium quantity is the quantity
where price has adjusted so that QD = QS. At the equilibrium price, the quantity that buyers are willing to
purchase exactly equals the quantity the producers are willing to sell. Actions of buyers and sellers
naturally tend to move a market towards the equilibrium.

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" is where Quantity supplied > Quantity demanded, and results in surpluses at the current
price. A large surplus is known as a "glut". In cases of excess supplyu price is too high to be at equilibrium
suppliers find that inventories increase suppliers react by lowering prices this continues until price falls to
equilibrium

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  occurs when Quantity demanded > Quantity supplied, and results in shortages at
current prices. In cases of excess demandu buyers cannot buy all they want at the going price sellers find
that their inventories are decreasing sellers can raise prices without losing sales prices increase until
market reaches equilibrium

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In free markets, surpluses and/or shortages tend to be temporary and obey the law of supply and
demand, since actions of buyers and sellers tend to match prices back toward their equilibrium levels.

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International trade is exchange of capital, goods, and services across international borders or territories.
In most countries, it represents a significant share of gross domestic product (GDP).Industrialization,
advanced transportation, globalization, multinational corporations, and outsourcing are all having a major
impact on the international trade system. Without international trade, nations would be limited to the
goods and services produced within their own borders.

International trade is also a branch of economics, which, together with international finance, forms the
larger branch of international economics.

International trade is typically more costly than domestic trade. The reason is that a border typically
imposes additional costs such as tariffs, time costs due to border delays and costs associated with
country differences such as language, the legal system or culture.

International trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade
in capital, labor or other factors of production.

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For centuries under the belief in mercantilism most nations had high tariffs and many restrictions on
international trade. Free trade is usually most strongly supported by the most economically powerful
nations, though they often engage in selective protectionism for those industries which are strategically
important such as the protective tariffs applied to agriculture by the United States and Europe.The
Netherlands and the United Kingdom were both strong advocates of free trade when they were
economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest
proponents. However, many other countries (such as India, China and Russia) are increasingly becoming
advocates of free trade as they become more economically powerful themselves. Multilateral treaties like
the General Agreement on Tariffs and Trade (GATT) and World Trade Organization have attempted to
promote free trade while creating a globally regulated trade structure. These trade agreements have often
resulted in discontent and protest with claims of unfair trade that is not beneficial to developing countries.

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As tariff levels fall there is also an increasing willingness to negotiate non-tariff measures, including
foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost
associated with meeting trade and customs procedures.

Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often
support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies,
particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the
major international trade treaties which allow for more protectionist measures in agriculture than for most
other goods and services.

During recessions there is often strong domestic pressure to increase tariffs to protect domestic
industries. This occurred around the world during the Great Depression. Many economists have
attempted to portray tariffs as the underlining reason behind the collapse in world trade that many believe
seriously deepened the depression.

The regulation of international trade is done through the World Trade Organization at the global level, and
through several other regional arrangements such as MERCOSUR in South America, the North American
Free Trade Agreement (NAFTA) between the United States, Canada and Mexico, and the European
Union between 27 independent states. The 2005 Buenos Aires talks on the planned establishment of the
Free Trade Area of the Americas (FTAA) failed largely because of opposition from the populations of
Latin American nations. Similar agreements such as the Multilateral Agreement on Investment (MAI) have
also failed in recent years.



´ Greater variety of goods available for consumption ± international trade brings in different
varieties of a particular product from different destinations. This gives consumers a wider array of choices
which will not only improve their quality of life but as a whole it will help the country grow.

´ Efficient allocation and better utilization of resources since countries tend to produce goods in
which they have a comparative advantage. When countries produce through comparative advantage,
wasteful duplication of resources is prevented. It helps save the environment from harmful gases being
leaked

´ Promotes efficiency in production as countries will try to adopt better methods of production to
keep costs down in order to remain competitive. Countries that can produce a product at the lowest
possible cost will be able to gain a larger share in the market. Therefore an incentive to produce efficiently
arises. This will help standards of the product to increase and consumers will have a good quality product
to consume.

´ More employment could be generated as the market for the countries¶ goods widens through
trade. International trade helps generate more employment through the establishment of newer industries
to cater to the demands of various countries. This will help countries bring down their unemployment rat

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Companies doing business across international borders face many of the same risks as would normally
be evident in strictly domestic transactions. For example,

Buyer insolvency (purchaser cannot pay);

Non-acceptance (culture issue) (buyer rejects goods as different from the agreed upon specifications);

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Credit risk (allowing the buyer to take possession of goods prior to payment);

Government regulatory risk (e.g., a change in rules that prevents the transaction); legal political
environment and local government regulations

Intervention (governmental action to prevent a transaction being completed);

Political risk (change in leadership interfering with transactions or prices); and

War and other uncontrollable events.eg the situation recently occurred in middle east countries Egypt,
Tunisia and Libya

Lack of skilled labor

Taxes impositions may be high to foreign investors to prevent domestic industries etc

Conversion of currencies for international purchasing

International trade regulations

Lack of goods infrastructures for international practices e.g telecommunications networks

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Governments have had difficult time in solving the four conflicts problems i.e to have the balance between
employment arte, inflation, economic growth and balance of payments.

If for example imports increases and the exchanges rate becomes stronger includes tariffs this will affect
the infant domestic industries and unemployment will increase. When government interference and build
to domestic industries this will increase exports and employment will raise so do inflation.

When money loses its velocity then then the economy stagnates. The government interference by
increasing its spending this will stimulate the economy. If government spending increase and taxation
increase the economy cools down.

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