Introduction To International Trade

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International Trade > Introduction to International Trade
Introduction to International Trade
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
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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.
International Trade
View on Boundless.com
www.boundless.com/economics/textbooks/boundless-economics-textbook/international-trade-31/introduction-to-international-trade-124/reasons-for
-trade-489-12585
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

www.boundless.com/economics/textbooks/boundless-economics-textbook/international-trade-31/introduction-to-international-trade-124/understandi
ng-production-possibilities-490-12586
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.
China and Consumer Electronics

www.boundless.com/economics/textbooks/boundless-economics-textbook/international-trade-31/introduction-to-international-trade-124/defining-a
bsolute-advantage-491-12587
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.
Comparative Advantage
www.boundless.com/economics/textbooks/boundless-economics-textbook/international-trade-31/introduction-to-international-trade-124/defining-c
omparative-advantage-492-12588
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
www.boundless.com/economics/textbooks/boundless-economics-textbook/international-trade-31/introduction-to-international-trade-124/absoluteadvantage-versus-comparative-advantage-493-12589
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.
www.boundless.com/economics/textbooks/boundless-economics-textbook/international-trade-31/introduction-to-international-trade-124/benefits-ofspecialization-494-12590
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.
www.boundless.com/economics/textbooks/boundless-economics-textbook/international-trade-31/introduction-to-international-trade-124/relationshi
p-between-specialization-and-trade-495-12591
Appendix
International Trade
Key terms
Absolute advantage The capability to produce more of a given product using less of a given resource than a competing entity.
Absolute advantage The capability to produce more of a given product using less of a given resource than a competing entity.
Autarky National economic self-sufficiency.
comparative advantage The ability of a party to produce a particular good or service at a lower marginal and opportunity cost
over another.
over another.
over another.
over another.
competitive advantage Something that places a company or a person above the competition
Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity);
the most valuable forgone alternative.
Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity);
the most valuable forgone alternative.
Production possibilities frontier A graph that shows the combinations of two commodities that could be produced using the
same total amount of each of the factors of production.
International Trade
International Trade
Countries benefit from producing goods in which they have comparative advantage and trading them for goods in which other countries have the
comparative advantage.
Wikimedia. "CMA CGM Balzac." CC BY-SA https://commons.wikimedia.org/wiki/File:CMA_CGM_Balzac.jpg View on Boundless.com
International Trade
Production Possibilities Frontier

If production is efficient, the economy can choose between combinations on the PPF.Point X, however, is unattaible with existing resources and
technology if trade does not occur.
Wikipedia. "Production Possibilities Frontier Curve." CC BY-SA https://en.wikipedia.org/wiki/File:Production_Possibilities_Frontier_Curve.svg
International Trade
Absolute Advantage
Party B has an absolute advantage in producing widgets.It can produce more widgets with the same amount of resources than Party A.
Wikimedia. "Absolute advantage example 1." CC BY http://commons.wikimedia.org/wiki/File:Absolute_advantage_example_1.png View on Boundless.com
International Trade
China and Consumer Electronics

Many consumer electronics are manufactured in China.China can produce such goods more efficiently, which gives it an absolute advantage relative to
many countries.
Wikimedia. "Iphone 4G-3 des screen." CC BY-SA https://commons.wikimedia.org/wiki/File:Iphone_4G-3_des_screen.png View on Boundless.com
International Trade
Chiplandia has a comparative advantage in producing computer chips, while Entertainia has a comparative advantage in producing CD players.Both
nations can benefit from trade.
Wikimedia. "Comparative Advantage." CC BY https://commons.wikimedia.org/wiki/File:Comparative_Advantage.jpg View on Boundless.com
International Trade
Absolute Advantage
Country A has an absolute advantage in making both food and clothing, but a comparative advantage only in food.
Wikimedia. "Absolute advantage." CC BY-SA https://commons.wikimedia.org/wiki/File:Absolute_advantage.jpg View on Boundless.com
International Trade
Britain has a comparative advantage in cloth and Portugal in wine.Both countries can benefit from specialization and trading as long as the international
price for each good is less than or equal to the opportunity cost of producing the imported good domestically.
Wikipedia. "Comparative advantage." CC BY http://en.wikipedia.org/wiki/Comparative_advantage View on Boundless.com
International Trade
Russia and Gas Exports

In the recent past Russia has specialized in the production and export of natural gas, which it can produce with low opportunity costs.It exports the
natural gas and uses the proceeds to import items which would have higher opportunity costs.
Wikimedia. "Gas pipeline internment - geograph.org.uk - 899546." CC BY-SA
https://commons.wikimedia.org/wiki/File:Gas_pipeline_internment_-_geograph.org.uk_-_899546.jpg View on Boundless.com
International Trade
Economies of Scale
As the output increases, the average cost falls (to a point) on the long run average cost curve (LRAC).Countries the specialize can take advantage of
economies of scale and become more efficient.
Wikipedia. "Economies of scale." Public domain http://en.wikipedia.org/wiki/File:Economies_of_scale.PNG View on Boundless.com
International Trade
Tom has the comparative advantage in producing ketchup, while Bob has the comparative advantage in producing mustard.
Wikimedia. "Comparative advantage 2." CC BY-SA https://commons.wikimedia.org/wiki/File:Comparative_advantage_2.jpg View on Boundless.com
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
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
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
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
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
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
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
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
Saylor OER. "Economics Saylor.org Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Economics/
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
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
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
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
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
C) Import goods if they can be produced elsewhere
D) Export goods if the opportunity cost of exporting is lower than the cost
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
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
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
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
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
D) All 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
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
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
International Trade
Attribution
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https://en.wikipedia.org/wiki/Production%25E2%2580%2593possibility_frontier
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International Trade
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International Trade
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