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Unit 8 — International Trade
Purpose:
To illustrate the concepts of specialization and comparative advantage, showing that trade benefits society as a whole but can hurt certain groups. Conversely, tariffs, quotas, and other trade restrictions can protect certain groups and industries but generally restrict the amount of goods available and raise prices. Trade is one dimension of globalization; others include immigration and foreign direct investment.
Objectives:
- If two countries have different opportunity costs in the production of a good, then the country with the lower opportunity cost has the comparative advantage.
- It is more efficient from a world economic point of view for nations to specialize in the production of those goods for which they have a comparative advantage and to trade for other goods.
- Free trade generally benefits society as a whole because it results in the least costly way of producing goods. However, in each country, there are industries that may not be able to compete effectively in world markets and, therefore, may decline. Thus free trade can hurt certain industries and certain groups in the economy.
- Countries may decide to restrict imports in order to protect industries and jobs and for national security reasons. Trade restrictions include tariffs and quotas. Protectionism benefits certain groups at the expense of the economy as a whole.
- Immigration and foreign direct investment are other channels of investment that can both substitute for and be complementary to trade.
