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Unit 27 — International Trade

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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Immigration and foreign direct investment are other channels of investment that can both substitute for and be complementary to trade.

Audio and Transcripts

Meet the Series Experts

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William A. Brock

William A. Brock

U.S. Senator from Tennessee, 1971–1977, Congressman from Tennessee, 1963–1971, and U.S. Trade Representative and Secretary of Labor under Ronald Reagan.

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Luis De La Calle

Luis De la Calle

Managing Director and founding partner of De la Calle, Madrazo, Mancera, S.C. (CMM), specializing in international trade.

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John Dingell Jr.

John Dingell, Jr.

Dean of the U.S. House of Representatives and currently its longest-serving member, having been a U.S. Congressman from Michigan since 1955.

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  1. The MAIN purpose of a tariff is to:

    protect domestic industry from competition.

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  2. Generally, a nation should probably specialize in those products:

    in which it has comparative advantage.

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  3. Which of the following BEST describes the effect of free trade upon prices? Under free trade:

    domestic prices of exported items tend to rise in the exporting country and decline in the importing country.

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  4. Imported French wine is $1.25 per liter. Under the market conditions shown in this graph, we can conclude that:

    chart chart

    the U.S. will tend to import French wine.

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  5. Economist Waldo B. was overheard making the remark that more tariffs could do nothing but enhance terms of trade for the U.S. “After all,” says Waldo, “we’re the most technologically efficient nation in the world. Why shouldn’t everyone want to trade with us? Meanwhile, we must do something to look out for ourselves.” Waldo’s argument is based on the fallacious assumption that:

    trade cannot be mutually beneficial.

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  6. Economists generally dislike the practice of restricting trade. Their MAIN criticism of this practice is that it:

    encourages inefficiency in the American market.

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