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Introduction to International Trade and Trade Policy

Introduction to International Trade and Trade Policy. IB Economics Section 4.1. Comparative Advantage. Comparative advantage : when a country (or firm) has a lower opportunity cost of producing a good or service

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Introduction to International Trade and Trade Policy

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  1. Introduction to International Trade and Trade Policy • IB Economics • Section 4.1

  2. Comparative Advantage Comparative advantage: when a country (or firm) has a lower opportunity cost of producing a good or service • Lower opportunity cost implies that a country (or firm) can sell a good or service at a lower price • Specialization in areas where there is a comparative advantage enables mutually beneficial gains from trade

  3. Gains From Free Trade • In markets with a comparative disadvantage • Goods are imported • Consumer Surplus increases • Producer Surplus decreases • Total Surplus increases

  4. Gains From Free Trade • In markets with a comparative advantage • Goods are exported • CS decreases • PS increases • TS increases

  5. An Example of Trade Policy Analysis: Tariffs on Imports Comparison to free trade • CS decreases • PS increases • TS decreases • Imports decrease • The government raises revenue

  6. General Observations • TS is greater with free trade than with no free trade • TS is greater with free trade than with tariffs (or quotas) • There are “winners” and “losers” with free trade and trade policies

  7. Common Arguments Against Free Trade • Loss of jobs • National security • Protection of infant industries • Unfair competition • Protection as a bargaining chip • Sweatshops • Environmental consequences

  8. Reference • www.esm.ucsb.edu/academics/courses/251/Lectures/8_Trade

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