Notes
Why nations trade
- Absolute advantage: producing more with the same resources. Comparative advantage: producing at a lower opportunity cost.
- Countries gain by specializing in their comparative advantage and trading at terms of trade between their opportunity costs. Trade lets them consume beyond their own PPF.
- Trade helps consumers and exporters overall, but some workers and industries facing imports lose.
Trade barriers and agreements
- Tariffs (taxes on imports), quotas (limits on quantity), embargoes (bans), subsidies and standards. Barriers raise prices and invite retaliation, as after the Smoot-Hawley Tariff (1930).
- Arguments for protection: jobs, infant industries, national security, unfair practices such as dumping. Arguments for free trade: lower prices, more choice, competition, growth.
- Agreements: GATT (1947), WTO (1995), NAFTA (1994) replaced by USMCA (2020), the European Union.
Exchange rates
- The price of one currency in another. A dollar that appreciates makes imports cheaper and U.S. exports pricier; a dollar that depreciates does the reverse.
Balance of trade and globalization
- Balance of trade = exports − imports. The U.S. has run trade deficits since 1976. The balance of payments includes the current and financial accounts.
- Globalization links economies through trade, investment and technology. The World Bank and IMF (1944) assist developing countries.
Topics in this unit
Each topic has its own short notes and practice.
Practice
Ana gives up fewer apples per pear, so her opportunity cost of pears is lower.
The tariff makes imports more expensive, which helps domestic producers and raises prices for buyers.
$\displaystyle \frac{40}{0.80} = 50$ dollars.
A weaker dollar means each yen buys more dollars' worth of U.S. goods.
Specialization based on comparative advantage raises total output and lowers costs.
The United States-Mexico-Canada Agreement took effect in 2020.
Free response
Write your answer first, then open the scoring guide.
Free-response question
In one day, a worker in Northland can produce 20 bushels of corn or 10 bolts of cloth. A worker in Southland can produce 9 bushels of corn or 3 bolts of cloth.
(a) Which country has the absolute advantage in each good? Explain.
Show the answer and scoring guide
Northland has the absolute advantage in both corn and cloth, because a Northland worker produces more of each good in a day (20 versus 9 bushels of corn and 10 versus 3 bolts of cloth).
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(b) Calculate each country's opportunity cost of one bolt of cloth, and identify which country has the comparative advantage in each good.
Show the answer and scoring guide
Northland: 1 cloth costs $\displaystyle \frac{20}{10} = 2$ corn. Southland: 1 cloth costs $\displaystyle \frac{9}{3} = 3$ corn. Northland has the comparative advantage in cloth. For corn, Northland gives up $\displaystyle \frac{1}{2}$ cloth per bushel and Southland gives up $\displaystyle \frac{1}{3}$ cloth, so Southland has the comparative advantage in corn.
Check off the points you earned:
(c) The two countries agree to trade 1 bolt of cloth for 2.5 bushels of corn. Explain why both countries gain from this trade.
Show the answer and scoring guide
Northland makes cloth and trades it. It gets 2.5 corn for each cloth, while making one cloth costs it only 2 corn. Southland makes corn and trades it. It pays 2.5 corn for a cloth that would cost it 3 corn to make. Since the price falls between the two opportunity costs, each country gets the other good more cheaply than it could make it itself.
Check off the points you earned: