Absolute and Comparative Advantage

Absolute AdvantageA country can

produce a product more efficiently than can another country.

This can be determined by climate, resources, and location.

Ex. LobsterCan you think of

other examples?

Comparative AdvantageThe ability to produce a product relatively

more efficiently, or at a lower cost.Opportunity cost determines this….how much

would one country have to give up to produce a good?

Ex. OilSaudi Arabia

What does this mean in the real world?Columbian Coffee for US machineryOil for military aircraftNAFTA tomorrow

Barriers to International Trade

TariffsProtective Tariffs Revenue TariffsHigh enough to protect

less-efficient domestic industries.

Ex. It costs $1 to produce a pencil in the US but only .35 in another country. How much would they tariff have to be to protect it?

High enough to generate revenue but not prohibit the import.

Duty taxes…not needed today. Look on page 232.

Why is so little gained from this? Why doesn’t the government use it more?

QuotaIf foreign goods cost

so little, then the government can limit the imports.

In the past this has worked for cars.

What about the future?

Arguments for ProtectionProtectionists

Favor trade barriers that protect domestic industries

Free TradersFavor fewer or even

no trade restrictions.