introduction to international trade

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Reasons for TradeUnderstanding Production PossibilitiesDefining Absolute Advantage Defining Comparative Advantage Absolute Advantage Versus Comparative Advantage Benefits of Specialization Relationship Between Specialization and Trade Introduction to International TradeInternational Trade > Introduction to International Trade

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www.boundless.com/economicsInternational trade is the exchange of capital, goods, and services across international borders or territories.Each nation should produce goods for which its domestic opportunity costs are lower than the domestic opportunity costs of other nations and exchange those goods for products that have higher domestic opportunity costs compared to other nations.Benefits of trade include lower prices and better products for consumers, improved political ties among nations, and efficiency gains for domestic producers.Reasons for Trade

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International Trade > Introduction to International Trade

The production possibilities curve shows the maximum possible production level of one commodity for any production level of another, given the existing levels of the factors of production and the state of technology.Points outside the production possibilities curve are unattainable with existing resources and technology if trade does not occur with an external producer.Without trade, each country consumes only what it produces.However, because of specialization and trade, the absolute quantity of goods available for consumption is higher than the quantity that would be available under national economic self-sufficiency.Understanding Production Possibilities

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A country that has an absolute advantage can produce a good at lower marginal cost.A country with an absolute advantage can sell the good for less than the country that does not have the absolute advantage.Absolute advantage differs from comparative advantage, which refers to the ability to produce specific goods at a lower opportunity cost.Defining Absolute Advantage

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Even if one country has an absolute advantage in the production of all goods, it can still benefit from trade.Countries should import goods if the opportunity cost of importing is lower than the cost of producing them locally.Specialization according to comparative advantage results in a more efficient allocation of world resources.A larger quantity of outputs becomes available to the trading nations.Competitive advantage is distinct from comparative advantage because it has to do with distinguishing attributes which are not necessarily related to a lower opportunity cost.Defining Comparative Advantage

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The producer that requires a smaller quantity inputs to produce a good is said to have an absolute advantage in producing that good.Comparative advantage refers to the ability of a party to produce a particular good or service at a lower opportunity cost than another.The existence of a comparative advantage allows both parties to benefit from trading, because each party will receive a good at a price that is lower than its opportunity cost of producing that good.Absolute Advantage Versus Comparative Advantage

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Whenever countries have different opportunity costs in production they can benefit from specialization and trade.Benefits of specialization include greater economic efficiency, consumer benefits, and opportunities for growth for competitive sectors.The disadvantages of specialization include threats to uncompetitive sectors, the risk of over-specialization, and strategic vulnerability.Benefits of Specialization

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Nations decide whether they should export or import goods based on comparative advantages.Generally, nations can consume more by specializing in a good and trading it for other goods.When countries decide which country will specialize in which product, the essential question becomes who could produce the product at a lower opportunity cost.Relationship Between Specialization and Trade

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Free to share, print, make copies and changes. Get yours at www.boundless.comAppendixKey termsAbsolute advantage The capability to produce more of a given product using less of a given resource than a competing entity.Absolute advantage The capability to produce more of a given product using less of a given resource than a competing entity.Autarky National economic self-sufficiency.comparative advantage The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another.comparative advantage The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another.comparative advantage The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another.comparative advantage The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another.competitive advantage Something that places a company or a person above the competitionOpportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative.Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative.Production possibilities frontier A graph that shows the combinations of two commodities that could be produced using the same total amount of each of the factors of production.

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeInternational TradeCountries benefit from producing goods in which they have comparative advantage and trading them for goods in which other countries have the comparative advantage.

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Production Possibilities FrontierIf production is efficient, the economy can choose between combinations on the PPF.Point X, however, is unattaible with existing resources and technology if trade does not occur.

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Absolute AdvantageParty B has an absolute advantage in producing widgets.It can produce more widgets with the same amount of resources than Party A.

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China and Consumer ElectronicsMany consumer electronics are manufactured in China.China can produce such goods more efficiently, which gives it an absolute advantage relative to many countries.

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Comparative AdvantageChiplandia has a comparative advantage in producing computer chips, while Entertainia has a comparative advantage in producing CD players.Both nations can benefit from trade.

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Absolute AdvantageCountry A has an absolute advantage in making both food and clothing, but a comparative advantage only in food.

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Comparative AdvantageBritain has a comparative advantage in cloth and Portugal in wine.Both countries can benefit from specialization and trading as long as the international price for each good is less than or equal to the opportunity cost of producing the imported good domestically.

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Russia and Gas ExportsIn the recent past Russia has specialized in the production and export of natural gas, which it can produce with low opportunity costs.It exports the natural gas and uses the proceeds to import items which would have higher opportunity costs.

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Economies of ScaleAs the output increases, the average cost falls (to a point) on the long run average cost curve (LRAC).Countries the specialize can take advantage of economies of scale and become more efficient.

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Comparative AdvantageTom has the comparative advantage in producing ketchup, while Bob has the comparative advantage in producing mustard.

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Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeWhich of the following is NOT a benefit from international trade?A) More choices for consumersB) Increased comparative advantageC) Improved returns to investment in research and developmentD) Improved resource allocation

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International TradeWhich of the following is NOT a benefit from international trade?A) More choices for consumersB) Increased comparative advantageC) Improved returns to investment in research and developmentD) Improved resource allocation

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeWhat is the source of the net benefit from international trade?A) Comparative advantageB) Technology spilloversC) Maximization of consumptionD) Efficient levels of investment


International TradeWhat is the source of the net benefit from international trade?A) Comparative advantageB) Technology spilloversC) Maximization of consumptionD) Efficient levels of investment

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeImagine Russia exports lumber to Norway. Which of the following describes the price that Norway pays for this lumber?A) It is above Russia's and Norway's opportunity cost of producing lumberB) It is above Russia's and below Norway's opportunity cost of producing lumberC) It is below Russia's and Norway's opportunity cost of producing lumberD) It is below Russia's and above Norway's opportunity cost of producing lumber


International TradeImagine Russia exports lumber to Norway. Which of the following describes the price that Norway pays for this lumber?A) It is above Russia's and Norway's opportunity cost of producing lumberB) It is above Russia's and below Norway's opportunity cost of producing lumberC) It is below Russia's and Norway's opportunity cost of producing lumberD) It is below Russia's and above Norway's opportunity cost of producing lumber

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeWhich of these determines the location of the production possibilities frontier?A) Level of technologyB) Amount of raw materials availableC) All of these answersD) Amount of labor available


International TradeWhich of these determines the location of the production possibilities frontier?A) Level of technologyB) Amount of raw materials availableC) All of these answersD) Amount of labor available

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeFill in the blank. The gains from trade enables _______________ the production possibility frontier.A) Production outsideB) Consumption insideC) Consumption outsideD) Production inside

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International TradeFill in the blank. The gains from trade enables _______________ the production possibility frontier.A) Production outsideB) Consumption insideC) Consumption outsideD) Production inside

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeComplete the sentence with the most suitable pairs of words: (1) is the only sustainable way to consume outside the PPF curve and (2) allows us to shift the PPF curve outward in the long run.A) Efficiency (1); technology (2)B) Efficiency (1); trade (2)C) Trade (1); technology (2)D) Technology (1); efficiency (2)


International TradeComplete the sentence with the most suitable pairs of words: (1) is the only sustainable way to consume outside the PPF curve and (2) allows us to shift the PPF curve outward in the long run.A) Efficiency (1); technology (2)B) Efficiency (1); trade (2)C) Trade (1); technology (2)D) Technology (1); efficiency (2)

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeImagine Firm A has an absolute advantage in cereal production over Firm B. If both firms are producing 10 boxes of cereal an hour, what is true about the marginal cost of the 11th box of cereal?A) The marginal cost is lower for firm B than firm AB) The marginal cost is the same for both firmsC) The marginal cost is not related to absolute advantageD) The marginal cost is lower for Firm A than Firm B


International TradeImagine Firm A has an absolute advantage in cereal production over Firm B. If both firms are producing 10 boxes of cereal an hour, what is true about the marginal cost of the 11th box of cereal?A) The marginal cost is lower for firm B than firm AB) The marginal cost is the same for both firmsC) The marginal cost is not related to absolute advantageD) The marginal cost is lower for Firm A than Firm B

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeCountry A has a comparative advantage over Country B in the production of corn if ____________.A) the opportunity cost of producing corn is lowest in Country AB) the opportunity cost of producing corn is highest in Country AC) the marginal cost of producing corn is highest in Country AD) the marginal cost of producing corn is lowest in Country A


International TradeCountry A has a comparative advantage over Country B in the production of corn if ____________.A) the opportunity cost of producing corn is lowest in Country AB) the opportunity cost of producing corn is highest in Country AC) the marginal cost of producing corn is highest in Country AD) the marginal cost of producing corn is lowest in Country A

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeWhich of the following statements best describes the implications of comparative advantage?A) Export goods if they can be produced at a cheaper cost elsewhereB) Import goods if the opportunity cost of importing is lower than the cost of producing them locallyC) Import goods if they can be produced elsewhereD) Export goods if the opportunity cost of exporting is lower than the cost of producing them locally


International TradeWhich of the following statements best describes the implications of comparative advantage?A) Export goods if they can be produced at a cheaper cost elsewhereB) Import goods if the opportunity cost of importing is lower than the cost of producing them locallyC) Import goods if they can be produced elsewhereD) Export goods if the opportunity cost of exporting is lower than the cost of producing them locally

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeEconomic efficiency occurs when all trading partners _____________.A) have the same level of marginal productivityB) produce the item that they can sell at the lowest costC) specialize in the area(s) where they have a comparative advantageD) All of these answers


International TradeEconomic efficiency occurs when all trading partners _____________.A) have the same level of marginal productivityB) produce the item that they can sell at the lowest costC) specialize in the area(s) where they have a comparative advantageD) All of these answers

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeFill in the blank. For a country to have a comparative advantage in producing good A against another country, it should be able to produce A ______________.A) With less laborB) With less capitalC) At a lower opportunity costD) At a lower cost


International TradeFill in the blank. For a country to have a comparative advantage in producing good A against another country, it should be able to produce A ______________.A) With less laborB) With less capitalC) At a lower opportunity costD) At a lower cost

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeThere are two goods (bread and shirts) and two factors of production (labor and capital). Bread is capital-intensive, while shirts are labor-intensive. Country A is abundant in labor; Country B is abundant in capital. Under free trade, which is true?A) Country A will export shirts, while country B will export bread.B) Country A will export bread, while country B will export shirts.C) Country A will export both bread and shirts.D) Country B will export both bread and shirts.


International TradeThere are two goods (bread and shirts) and two factors of production (labor and capital). Bread is capital-intensive, while shirts are labor-intensive. Country A is abundant in labor; Country B is abundant in capital. Under free trade, which is true?A) Country A will export shirts, while country B will export bread.B) Country A will export bread, while country B will export shirts.C) Country A will export both bread and shirts.D) Country B will export both bread and shirts.

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeWhat is the difference between absolute advantage?A) A country can have a comparative advantage even if it does not have an absolute advantage.B) Absolute advantage is necessary for trade, while comparative advantage is not.C) Countries with a comparative advantage must have an absolute advantage, but not vis versa.D) None of these answers.


International TradeWhat is the difference between absolute advantage?A) A country can have a comparative advantage even if it does not have an absolute advantage.B) Absolute advantage is necessary for trade, while comparative advantage is not.C) Countries with a comparative advantage must have an absolute advantage, but not vis versa.D) None of these answers.

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeWhich one of the following is a benefit of specialization?A) Countries can take advantage of economies of scale.B) Consumers benefit from lower prices since goods are produced more efficiently.C) Countries can trade for the good in which they do not have a comparative advantage.D) All of these answers.


International TradeWhich one of the following is a benefit of specialization?A) Countries can take advantage of economies of scale.B) Consumers benefit from lower prices since goods are produced more efficiently.C) Countries can trade for the good in which they do not have a comparative advantage.D) All of these answers.

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeWhat do countries consider when deciding to specialize?A) Their absolute advantageB) Their level of economic developmentC) Their comparative advantageD) Their level of efficiency


International TradeWhat do countries consider when deciding to specialize?A) Their absolute advantageB) Their level of economic developmentC) Their comparative advantageD) Their level of efficiencyAttributionWikispaces. "mreape - UNIT 7 Open EconomY- International Trade and Finance." CC BY-SA http://mreape.wikispaces.com/UNIT+7+Open+EconomY-+International+Trade+and+FinanceWikispaces. "McHenry's AP Wiki - International Trade." CC BY-SA https://mchenry.wikispaces.com/International+TradeWikibooks. "IB Economics/International Economics/Reasons for trade." CC BY-SA 3.0 https://en.wikibooks.org/wiki/IB_Economics/International_Economics/Reasons_for_tradeWikipedia. "International trade." CC BY-SA 3.0 https://en.wikipedia.org/wiki/International_tradeBoundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//business/definition/comparative-advantageWikipedia. "Production possibilities frontier." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Production%20possibilities%20frontierWikibooks. "Principles of Economics/Production Possibilities." CC BY-SA 3.0 https://en.wikibooks.org/wiki/Principles_of_Economics/Production_PossibilitiesWikipedia. "Free trade debate." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Free_trade_debate#Production_possibilities_frontiers_and_indifference_curvesWikipedia. "Productionpossibility frontier." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Production%25E2%2580%2593possibility_frontierWikipedia. "Productionpossibility frontier." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Production%25E2%2580%2593possibility_frontierWikispaces. "McHenry's AP Wiki - International Trade." CC BY-SA https://mchenry.wikispaces.com/International+TradeWikispaces. CC BY-SA http://mallorykearney.wikispaces.com/file/view/MacroCh3.pptx?Wiktionary. "Autarky." CC BY-SA 3.0 http://en.wiktionary.org/wiki/AutarkyWikispaces. "econ100-powers-sectionA - Absolute Advantage and Comparative advantage." CC BY-SA http://econ100-powers-sectiona.wikispaces.com/Absolute+Advantage+and+Comparative+advantageWikispaces. "MBAecon - Comparative advantage and trade." CC BY-SA http://mbaecon.wikispaces.com/Comparative+advantage+and+tradeWikispaces. CC BY-SA http://business-tes.wikispaces.com/file/detail/Comparative+%2526+Absolute+advantage+notes.docWikipedia. "Absolute advantage." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Absolute_advantage

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeWikipedia. "Absolute advantage." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Absolute_advantageWiktionary. "Absolute advantage." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Absolute+advantageWikipedia. "Competitive advantage." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Competitive_advantageWikibooks. "IB Economics/International Economics/Reasons for trade." CC BY-SA 3.0 https://en.wikibooks.org/wiki/IB_Economics/International_Economics/Reasons_for_tradeWikipedia. "Comparative advantage." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Comparative_advantageWikispaces. "McHenry's AP Wiki - International Trade." CC BY-SA https://mchenry.wikispaces.com/International+TradeWikispaces. "McHenry's AP Wiki - International Trade." CC BY-SA https://mchenry.wikispaces.com/International+TradeWikispaces. "mreape - UNIT 7 Open EconomY- International Trade and Finance." CC BY-SA http://mreape.wikispaces.com/UNIT+7+Open+EconomY-+International+Trade+and+FinanceWiktionary. "competitive advantage." CC BY-SA 3.0 http://en.wiktionary.org/wiki/competitive+advantageBoundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//business/definition/comparative-advantageWiktionary. "Opportunity cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Opportunity+costWikipedia. "Comparative advantage." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Comparative_advantageWikispaces. "mrski-apecon-2008 - Chapter 3 - Interdependence and the Gains from Trade." CC BY-SA http://mrski-apecon-2008.wikispaces.com/Chapter+3+-+Interdependence+and+the+Gains+from+TradeWikispaces. "mrski-apecon-2008 - Chapter 3 - Interdependence and the Gains from Trade." CC BY-SA http://mrski-apecon-2008.wikispaces.com/Chapter+3+-+Interdependence+and+the+Gains+from+TradeWikispaces. CC BY-SA http://mallorykearney.wikispaces.com/file/view/MacroCh3.pptx?Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//business/definition/comparative-advantageWiktionary. "Absolute advantage." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Absolute+advantageWikipedia. "Comparative advantage." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Comparative_advantageWikipedia. "Economies of scale." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Economies_of_scale

Free to share, print, make copies and changes. Get yours at www.boundless.comInternational TradeWikispaces. "mrski-apecon-2008 - Chapter 3 Independence and the Gains from Trade." CC BY-SA http://mrski-apecon-2008.wikispaces.com/Chapter+3+Independence+and+the+Gains+from+TradeWikispaces. "McHenry's AP Wiki - International Trade." CC BY-SA http://mchenry.wikispaces.com/International+TradeWikispaces. "mrski-apecon-2008 - Chapter 3 - Interdependence and the Gains from Trade." CC BY-SA http://mrski-apecon-2008.wikispaces.com/Chapter+3+-+Interdependence+and+the+Gains+from+TradeWikipedia. "Gains from trade." CC BY-SA 3.0 https://en.wikipedia.org/wiki/Gains_from_tradeWikispaces. "mrski-apecon-2008 - Chapter 3 - Interdependence and the Gains from Trade." CC BY-SA http://mrski-apecon-2008.wikispaces.com/Chapter+3+-+Interdependence+and+the+Gains+from+TradeWikispaces. CC BY-SA http://mallorykearney.wikispaces.com/file/view/MacroCh3.pptxBoundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//business/definition/comparative-advantageWikipedia. "Learning." CC BY-SA 3.0 http://en.wikipedia.org/wiki/LearningWikispaces. CC BY-SA http://mrski-apecon-2008.wikispaces.com/CHAPTER+3+.+INTERDEPENDENCE+AND+THE+GAINS+FROM+TRADE+%253B)Wikispaces. "mrski-apecon-2008 - Chapter 3 Independence and the Gains from Trade JBS." CC BY-SA http://mrski-apecon-2008.wikispaces.com/Chapter+3+Independence+and+the+Gains+from+Trade+JBSWikispaces. "mrski-apecon-2008 - Chapter 3 - Interdependence and the Gains from Trade." CC BY-SA http://mrski-apecon-2008.wikispaces.com/Chapter+3+-+Interdependence+and+the+Gains+from+TradeWiktionary. "Opportunity cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Opportunity+cost

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introduction to international trade

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