Chapter 9 Comparative Advantage and the Gains from International Trade Foreign made goods have lower prices or higher quality than the US made goods they have replaced The increase in trade is the result of o Falling costs of shipping products around the world o The spread of inexpensive and reliable communications o Changes in government policies People trade for one reason trade makes them better off In trade we benefit from comparative advantage of other people and vice versa No Complete specialization in the real world o Not all goods and service are traded internationally o Production of most goods involves increasing opportunity costs o Tastes for products differ Firms produce goods Main purpose of most tariffs and quotas is to reduce the foreign competition that domestic firms face Support of protectionism o Saving jobs o Protecting high wages o Protecting infant industries o Protecting national security Tariff a tax imposed by a government on imports Imports goods and services bought domestically but produced in other countries Exports goods and service produced domestically but sold in other countries Comparative advantage the ability of an individual firm or country to produce a good or service at a lower opportunity cost than competitors Climate and natural resources Relative abundance of labor and capital Technology o The process firms use to turn inputs into goods and services o Product technologies the ability to develop new products o Process technology the ability to improve the processes used to make External economics reductions in a firm s costs that result from an increase existing products in the size of an industry Opportunity cost the highest valued alternative that must be given up to engage in an activity Absolute advantage the ability to produce more of a good or service than competitors when suing the same amount of resources Autarky a situation in which a country does not trade with other countries Terms of trade the ratio at which a country can trade its ex ports for imports from other countries Free trade trade between countries that is without government restrictions makes consumers better off Tariffs taxes imposed by a government on goods imported into a country increases the cost of selling a good and hurts consumers Quota a numerical limit a government imposes on the quantity of a good that can be imported into the country Voluntary export restraint VER an agreement negotiated between two countries that place a numerical limit on the quantity of a good that can be imported by one country from the other World Trade Organization WTO an international organization that oversees international trade agreements Globalization the process of countries becoming more open to foreign trade and investments Protectionism the use of trade barriers to shield domestic firms from foreign competition causes losses to consumers and eliminates jobs in the domestic industries that buy the protected product Dumping selling a product for a price below its cost of production