How countries use comparative advantage and international trade to increase economic value. And how policies affecting international trade, also affect domestic market.

1. Group 1
Abhimanyu Sangwan
Bhawna Mehta
Kushal Agarwal
Nimish Deep
Tanay Tripathi
Gobind Singh Maini
COMPARATIVE ADVANTAGE
AND GAINS FROM
INTERNATIONAL TRADE

2. What is comparative advantage?
 Ability of an individual, firm or country to produce
a good or service at a lower opportunity cost than
other producers.
 Cherries and apple example
Autarky A situation in which a country does not trade with other
countries.

3. The Gains from Trade
OUTPUT PER HOUR OF WORK
Cell Phones MP3 Players
Japan 12 6
United States 2 4
OUTPUT PER HOUR OF WORK
Cell Phones MP3 Players
Japan .5 MP3 player 2 cell phones
United States 2 MP3 players .5 cell phone
Comparative Advantage in International Trade
Source: Microeconomics by Hubbard and Brien

4. World Production
PRODUCTION AND CONSUMPTION
Cell Phones MP3 Players
Japan 9000 1500
United States 1500 1000
PRODUCTION AND CONSUMPTION
Before Trade After Trade
Cell Phones 10500 12000
MP3 Players 2500 4000
Without Trade
Does Anyone Lose as a Result of International Trade?
NOT REALLY Source: Microeconomics by Hubbard and Brien

5. Why Don’t We See Complete Specialization?
• Not all goods and services are traded internationally.
• Production of most goods involves increasing
opportunity costs.
• Tastes for products differ.

6. How Countries Gain
from International Trade
• Climate and natural resources.
 This source of comparative advantage is the most obvious.
• Relative abundance of labor and capital.
 Some countries, such as the United States, have many highly skilled workers and a
great deal of machinery.
• Technology.
 Broadly defined, technology is the process firms use to turn inputs into goods and
services.
• External Economies
 Reductions in a firm’s costs that result from an increase in the size of an industry.

7. The U.S. Market for Ethanol under Autarky
Source: Microeconomics by Hubbard and Brien

8. The Effect of Imports on the U.S. Ethanol
Market
Source: Microeconomics by Hubbard and Brien

9. The Effects of a Tariff on Ethanol
Source: Microeconomics by Hubbard and Brien

10. The Economic Effect of the U.S. Sugar
Quota
Source: Microeconomics by Hubbard and Brien

11. Why does Government restricts free trade?
• Protectionism: Use of trade barriers to protect domestic firms
from foreign competition.
• Saving jobs
• Protecting high wages
• Protecting Infant Industries
• 2 other factors at work
• Costs of tariffs and quotas large in totality but small per person
• Jobs lost are easy to identify; jobs created by foreign trade relatively
easy

12. Critique of Trade Restrictions
• Reduces Consumer benefit
• Increases overall cost
• Decreases competitiveness in market
• Does not incentivize domestic firms to innovate

13. References
 BOOKS
• Microeconomics
by R. Glenn Hubbard and Anthony Patrick O. Brien
 WEBSITES
• http://en.wikipedia.org/wiki/Import_substitution_industrialization