Business

Government and Business Comm394 International Trade Policy

1 FLORENCIA JAUREGUIBERRY SAUDER SCHOOL OF BUSINESS

Trade vs Protection

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 The theory: Why is trade desired?  What are the policy tools that affect trade?  What are the justifications for trade policy?

Trade vs Autarky: The Framework

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Trade vs Autarky: Welfare Analysis

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Theory of Comparative advantage

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Ricardo demonstrated that by specializing in producing the product that one has a comparative advantage (which MAY NOT be ones in which the country has an absolute advantage) the world can expand total world output with the same quantity of resources (potential Pareto improvements)

Theory of Comparative Advantage: Definitions

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A country is said to have a comparative advantage in the production of a good if the opportunity cost of producing more of that good is lower in that country than in others A country is said to have a competitive advantage in the production of a good if it can produce at a lower cost than its international competitors

Example

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 Assumptions  2 countries  2 goods  Labor market  Technology

Milk Country A Country C 4 2 Dulce de Leche 4 1

Example

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 Autarky

 Country C specializes in the production of Milk

 Country C specializes in the production of DdL

Ricardo ignores

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 Cost of moving workers between industries  Imperfect competition  Increasing returns to scale

Increasing Returns to Scale

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If an industry has IRS production Specialization and trade can improve world welfare and the benefits are shared by trading countries Production at a larger scale (=more output) can be made at a lower cost

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Examples: chemicals, petroleum, steel, automobiles

Increased competition

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If a foreign country is a monopolist,

 Trade can increase competition, affecting trade

patterns (substitution of goods when competitors enter the market).

 The disciplining hand of greater competition can...