INR2002 Spring 2016 Exam 2 Ch 7 10 Review What is international trade and why do states engage in it International trade territories is the exchange of capital goods and services across international borders or Actors want to engage in foreign trade because they wish to utilize the benefits of specialization sometimes known as the division of labor that benefit society as a whole o Specialization permits diverse segments of society to focus on different economic activities in ways Adam Smith The Wealth of Nations claimed that self sufficiency was foolish because a greater division of labor made societies wealthier Specialization increases productivity and productivity fuels economic growth What do they trade and with whom Countries trade items in which the country has a comparative advantage in producing over the other country When comparative advantage is determined the country in need of a good or service they cannot currently produce will then trade with the country with comparative advantage in the needed product o Example Country A has comparative advantage in tropical fruit Country B trades what it has comparative advantage in for country A s tropical fruit is the ability of a country or firm to produce a particular good or service more efficiently Comparative advantage than other goods or services such that its resources are most efficiently employed in this activity The comparison is to the efficiency of other economic activities the actor might undertake not to the efficiency of other countries or firms o Comparative advantage implies that a nation gains most by specializing in producing and exporting what it produces most efficiently o Comparative advantage implies free trade Heckscher Ohlin trade theory the factors of production in which it is well endowed Thus a labor rich country will export goods that make intensive use of labor the theory that a country will export goods that make intensive use of o This theory tries to explain national comparative advantage and therefore national trading patterns Basic factors of production Land an essential input into agricultural production Labor usually meaning unskilled labor Capital for investment which refers both to the machinery and equipment with which goods are produced and to the financial assets necessary to employ this machinery and equipment Human capital which refers to skilled labor so called because the labor has been enhanced by investment in training and education Factor endowments of how much a country has of each one of the basic factors of production explain what determines national comparative advantage and in turn what countries produce and export o A country will export goods that make intensive use of the resources the country has in abundance its comparative advantage and it will import goods that make intensive use of the country s scarce resources Example poor countries with little capital import the capital intensive products they need analogous trade patterns o Each of the factors of production can be associated with different socioeconomic actors Example a country abundant in land factor will most likely have many farmers actor unskilled skilled laborers have unskilled skilled labor to sell on the labor market Broad outlines of international trade explained by Heckscher Ohlin theory Industrial countries rich in capital and skilled labor human capital Export manufactured goods Developing countries rich in land raw materials or unskilled labor or a combination of the three Export agricultural products minerals or labor intensive manufactures o Theory also explains changes over time in a country s trade relations As a poor country with labor and land but little capital exports farm goods they can accumulate capital and workers become skilled endowments change Economic noneconomic things that encourage trade Countries that share a currency Countries that invest heavily in one another s economies Countries that are geographically close together lower transportation costs Diplomatic and military relations between countries Countries whose governments are friendly tend to trade more than those that are hostile Trade between hostile nations is riskier Governments often pursue close economic ties with their allies o The most important noneconomic source of international trade is national trade policies undertaken to address the interests of domestic constituencies What are the benefits and costs of trade and who is helped and hurt by it Imports gains exports costs Trade protections hurt economies because they raise the price of imports for consumers and reduce the efficiency of domestic production o Protectionism the imposition of barriers to restrict imports 2 o Trade barriers government limitations on the international exchange of goods includes tariffs quantitative restrictions quotas import licenses requirements that governments only buy domestically produced goods and health and safety standards that discriminate against foreign goods Trade Barriers Tariff a tax imposed on imports Raises the domestic price of the imported good and may be applied for the purpose of protecting domestic producers from foreign competition Quantitative restriction quota limit placed on the amount of a particular good that is allowed to be imported Reduced quantity typically causes an increase in its domestic price a quantitative restriction has a tariff like effect making the good more expensive to domestic consumers Nontariff barriers to trade obstacles to imports other than tariffs trade taxes Examples include restrictions on the number of products that can be imported quantitative restrictions or quotas regulations that favor domestic over imported products and other measures that discriminate against foreign goods or services Goal of all trade barriers to shelter producers from foreign competition o Trade barriers usually reflect domestic concerns despite the fact that they implicate foreign relations Benefits to Trade Barriers Costs to Trade Barriers Trade barriers assist national producers Virtually all tools of trade protection tariffs quotas and other restrictions make imports more expensive which allows domestic producers to sell more of their products to raise their prices or both o This allows domestic producers to increase profits raise wages and hire more workers Trade barriers increase costs to consumers The most direct cost of protection is to consumers of the protected good o Tariffs and quotas raise the
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