Download Trade - Mr. Marinello`s Economics Page

Mr. Marinello * Chippewa Valley

Theory of Comparative Advantage:
▪ Developed by David Ricardo- He stated that a trading nation should
produce a certain product if it can do so at an opportunity cost lower
than that of another trading nation.
 The old view of international trade was absolute advantage: the ability of
one trading nation to make a product more efficiently than another trading
nation.
▪ If Portugal could make grape juice more efficiently than England, and if
England could make cloth more efficiently than Portugal, then trade
would be beneficial to both.
▪ Ricardo challenged this view-what if Portugal made both products more
efficiently than England? Would trade still be beneficial? He said yes- all
based on opportunity cost.
Portugal
England
Grape Juice
2 hours/jug
4 hours/jug
Cloth
6 hours/yard
8 hours/yard
▪ For Portugal, every yard of cloth costs 3 jugs of grape
juice in lost opportunity.
▪ In England, every yard of cloth costs only 2 jugs of
grape juice.
▪ Portugal would be wise to buy cloth from England
and to specialize in grape juice.

Absolute advantage:
 the ability of a country to produce more of a
good or service than competitors, using the same
amount of resources.

Comparative advantage:
 the ability of a country to produce a particular
good or service at a lower marginal and
opportunity cost over another

Since the 1930s, nations have sought to expand
trade and reduce or eliminate trade barriers.
Organized themselves into groups.
 European Union
▪ 20% of global trade exports & imports—world’s biggest
trader.
▪ Established monetary union- all use the Euro.
▪ Removed barriers to free trade among member nations.
▪ Ultimate goal is to have European borders as free and open as
US state borders.
 NAFTA- North American Free Trade Agreement
▪ 1990- free trade between US, Mexico & Canada
▪ In 1994 it eliminated tariffs in half of the goods exported to
Mexico from the US.
 WTO- World Trade Organization
▪ In 1944 Allied Nations met to make plans after WWII. They
produced GATT- General Agreement on Tariffs & Trade-
which laid out rules and policies for international trade.
Developed into WTO- now has 150 nations
▪ Purposes of WTO:
▪ Negotiating & administering trade agreements
▪ Resolving trade disputes
▪ Monitoring trade policies of member nations
▪ Providing support to developing countries.

Any law passed to limit free trade among nations.

5 types:
 Almost all nations pass some sort of laws that
limit trade.
▪ Lead to higher prices on restricted items
▪ Economic retaliation by other nations
▪ Basically political in nature
 Quotas: limits on the amount of a product that can
be imported.
▪ The US has a quota on the amount of textiles that are allowed to be
imported. They limit supply and keep textile prices relatively high
 Tariffs: a fee charged for goods brought into a
country from another country. 2 types:
▪ Revenue tariffs: taxes on imports specifically to raise moneyrarely used.
▪ Protective tariff: a tax on imported goods to protect domestic
goods.
▪ Raise prices on goods produced more inexpensively elsewhere,
which minimizes the price advantage the imports have over
domestic goods.
 Voluntary Export Restraint:
▪ a country’s self-imposed restriction on exports.
 Embargoes:
▪ a law that cuts off trade with a specific country.
Used often for political purposes. US & Cuba.
 Informal Trade Barriers:
▪ indirect—licenses, environmental regulations
and health and safety measures.

Impact of Trade Barriers
 Higher Prices & Trade Wars

Arguments for Protectionism
 Protecting Domestic Jobs
 Protecting infant or start up industries
 Protecting national security

Foreign Exchange
 Foreign exchange market: where currencies of different countries are bought
and sold. The exchange rate is the price of currency in the currencies of other
nations.
 Flexible rate of exchange: a system in which the exchange rate for currency
changes as supply & demand for the currency changes.
 The Fed keeps track of the international value of the dollar. They determine if
the dollar is strong or weak as measured against another currency.