Chapter 18 Gaining from International Trade comparative advantage the ability to produce a good at a lower opportunity cost that others relative costs determine the comparative advantage as long as comparative costs differ gains from trade are possible absolute advantage a nation can produce more of a good than another nation trade isn t based on absolute advantage trade between nations leads to an expansion in total output gains for each trading partner and higher incomes for both nations gains from international trade 1 gains from large scale production 2 gains from more competitive markets and 3 more pressure to adopt sound institutions impact of exporting o o o domestic price will rise to world price domestic producers of good winners domestic consumers of good losers country overall gains to producers are greater than losses to consumers if the world price is greater than the domestic price another country has a comparative advantage in producing the good the domestic country will benefit if they export the good No trade outcome Trade outcome impact of exporting o o o domestic price will rise to world price domestic producers of good winners domestic consumers of good losers country overall gains to producers are greater than losses to consumers if the world price is less than the domestic price another country has a comparative advantage in producing the good the domestic country will benefit if they import the good No trade outcome Trade outcome impact of importing o o o domestic price will fall to world price domestic producers of good losers domestic price of good winners country overall winners gains to consumers are greater than losses to producers but producers losses are visible consumer gains are harder to see trade openness index measures income levels and growths of countries note U S is rated 16 tariff a tax leveled on goods imported into a country benefits domestic producers and government hurts domestic consumers causes deadweight loss encourages lobbying by domestic producers import quota a specific limit or maximum quantity of a good permitted to be imported into a country during a given period benefits domestic and some foreign producers hurts domestic consumers causes deadweight loss encourages lobbying by producers trade restrictions create special interest groups prevent voluntary exchanges and reduce overall output and causes deadweight loss trade restrictions provide visible benefits for a few while spreading the costs over many national defense argument against free trade trade opponents say certain industries are vital to our national defense reality this argument is often abused the government could buy and store resources during peacetime economic growth of a strong defense infant industry argument against free trade trade opponents say new domestic industries just need a chance to develop reality once protection is granted it is difficult to remove over 100 years ago sugar quotas manufacturing tariffs and steel tariffs were put into place antidumping argument against free trade dumping selling a good in a foreign country at a lower price than its sold for in the domestic market trade opponents say foreign producers will cut prices to drive out competition then use power to gauge consumers reality firms can reenter the industry competition keeps prices low o o o o o o o trade fallacies o myth trade restrictions that limit imports save jobs reality trade restrictions increase employment in protected industries trade restrictions destroy jobs in domestic sectors that export trade restrictions hurt domestic consumers and producers via higher prices and restrictions reshuffle jobs reduce incomes o myth free trade with low wage countries will reduce U S wages reality lower prices increase consumers purchasing power and productivity difference is the source of wage differences
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