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Lecture Economics: Chapter 17 - Dean Karlan, Jonathan Morduch

Chapter 17 - International trade. In this chapter you will learn: What the definition is and root causes of comparative advantage? How to determine whether a country will become a net‐importer/exporter of a good? How to calculate change in surplus under trade? What the effects of tariffs and quotas are on quantity, price, and welfare?. | Chapter 17 International Trade © 2014 by McGraw‐Hill Education 1 What will you learn in this chapter? • What the definition is and root causes of comparative advantage. • How to determine whether a country will become a net‐importer/exporter of a good. • How to calculate change in surplus under trade. • What the effects of tariffs and quotas are on quantity, price, and welfare. • What the effects of trade are on factor distribution of income. • What the challenges are of establishing environmental or labor standards in international markets. © 2014 by McGraw‐Hill Education 2 Why trade? A review • Recall that voluntary exchanges generate surplus, leaving both participants better off than they were before. • In exchange, a country is said to have an absolute advantage if it can produce more of a good or service than other countries, given similar resources. • In exchange, a country is said to have a comparative advantage if it can produce a good or service at a lower opportunity cost than other countries. – Each country produces the goods in which it has a comparative advantage. • Both countries can have gains from trade when they specialize in producing the goods and services for which they have comparative advantages, respectively, and engage in trade. © 2014 by McGraw‐Hill Education 3 1 Why trade? A review • Suppose that the U.S. and China produce wheat and T‐shirts. • Their production capabilities are summarized as followed. Country Wheat produced (billions) United States Without trade (billions) Wheat consumed T-shirts consumed (billions) (billions) 1 0.3 1 0.3 China 2 1 2 1 Total 3 1.3 3 1.3 United States With trade T-shirts produced 3.5 0 1.1 0.8 China 0 2 2.4 1.2 Total 3.5 2 3.5 2 • Without specialization and trade, they are able to produce on their PPF, but are still inefficiently using their resources. • .