International Trade Flashcards
What is an absolute advantage?
When a country produces a good with fewer resources
What is a comparative advantatge?
When a country produces a good with a lower opportunity cost
What is a Production Possibility Frontier PPF, and what is the relevance of its slope?
The maximum amount that a country can produce given the scarce resources available.
The slope is the opportunity cost of producing y-axis goods over x-axis goods at any given point.
If country A has OC of 1/2 and country B has an OC of 2, who should produce, and why? What advantage does country A have?
Country A
Country A has to give up 1/2 of good b to produce a, where Country B has to give up 2 of good b to produce a
If you produce at a lower opportunity cost you have a comparative advantage
Brazil produces 100 pounds of beef or 10 autos
US produces 40 pounds of beef or 30 autos
Who has absolute advantage in each?
Brazil in beef
US in autos
Brazil produces 100 pounds of beef or 10 autos
US produces 40 pounds of beef or 30 autos
What is the opportunity cost of producing one pound of beef in Brazil? What is the opportunity cost to produce one pound of beef in US?
Who has comparative advantage in each
OC beef Brazil = sacrifice 10 autos to produce 100 beef = 10/100 = 1/10 of a car forgone to produce 1 beef
OC beef US = sacrifice 30 autos to produce 40 beef = 30/40 = 3/4 of a car foregone to produce 1 beef
Comparative advantage in beef goes to Brazil
OC cars Brazil = sacrifice 100 beef for 10 auto = 100/10 = 10 beef foregone to produce 1 car
OC cars US = sacrifice 40 beef for 30 auto = 40/30 = 4/3 = 1 1/3 beef forgone to produce 1 car
Comparative advantage in cars goes to US
Opportunity Cost Formula
What you sacrifice / What you gain
Under what conditions does comparative advantage lead to gains from trade?
If a country can import a quantity above its PPF then it is better off because of trade.
How can a country benefit from trade when it has an absolute advantage in the production of all goods?
Gains from trade come from specializing in a countries comparative advantage
What is intra-industry trade?
The trade of goods within the same industry from one country to another
What are the two reasons/economic benefits of intra-industry trade?
- The division of labor, which leads to learning, innovation, and unique skills
- Economies of scale, which will decrease a firms average cost of production as they increase output
What is an economy of scale?
An increase of a firms output decreases their average cost of production
What is a Tariff?
Taxes a government places on imported goods
If the removal of trade barriers is so beneficial to international growth, why would a nation tariff a product?
A nation might restrict trade on products to protect an industry that is important for national security or national identity.
Japan has a cultural tie to producing rice so they may tariff rice imports to maintain the GDP of the country
