This document discusses international trade and government policies around trade. It defines key terms like exports, imports, and comparative advantage. Countries will export goods they have a comparative advantage in producing and import goods they don't. The document outlines arguments for free trade, like increased specialization and efficiency, and more goods at lower prices. It also discusses protectionist views in favor of restricting trade, using policies like tariffs, quotas, and embargoes to protect domestic industries. International agreements and organizations that aim to facilitate trade are also covered.

1. PSCI 1500:
Introduction to Economics
Government Policies on
International Trade

2. International Trade
Buying and selling of goods and services among
different countries.
Export (X)
Good or service sold abroad.
Import (M)
Good or service purchased from abroad.
INTERNATIONAL TRADE OVERVIEW

3.  What determines whether a country imports or
exports a good?
 Who gains and who loses from free trade among
countries?
 What are the arguments that people use to
advocate trade restrictions?
INTERNATIONAL TRADE

4.  If the country decides to engage in international
trade, will it be an importer or exporter?
 The effects of free trade can be shown by
comparing the domestic price of a good without
trade and the world price of the good.
 The world price refers to the prevailing price in the
world markets.
 A country will either be an exporter or an importer
of the good.
WORLD PRICE AND COMPARATIVE
ADVANTAGE

5. • If a country has a comparative advantage, then the
domestic price will be below the world price, and
the country will be an exporter of the good.
• If the country does not have a comparative
advantage, then the domestic price will be higher
than the world price, and the country will be an
importer of the good.
WORLD PRICE AND COMPARATIVE
ADVANTAGE

6. Specialization
Productive resources concentrate on narrow
range of tasks or production of a limited variety of
goods and services.
Permits greater levels of production than would
be attained without specialization.
By concentrating on one productive activity,
resource can be used more efficiently and greater
efficiency results in greater output without raising
costs.
COMPARATIVE ADVANTAGE
& INTERNATIONAL TRADE

7. Comparative Advantage
A country has lower opportunity cost of
producing a good or service than does another
country.
If countries produce and trade on the basis of
their comparative advantages, the world will
have more goods and services than it otherwise
would.
COMPARATIVE ADVANTAGE
& INTERNATIONAL TRADE

8. COMPARATIVE ADVANTAGE
& INTERNATIONAL TRADE

9. Assume that Mexico can produce 500 lamps or 100
gallons of gasoline with 1 unit of resources and that
Venezuela can produce 25 lamps or 100 gallons of
gasoline with 1 unit of resources. Identify:
TRY THIS
The opportunity cost for Mexico in producing 1 lamp
• 1/5 gallons of gasoline
The opportunity cost to Venezuela of producing 1 lamp
• 4 gallons of gasoline
The country with the comparative advantage in lamp
• Mexico

10. Assume that Mexico can produce 500 lamps or 100
gallons of gasoline with 1 unit of resources and that
Venezuela can produce 25 lamps or 100 gallons of
gasoline with 1 unit of resources. Identify:
The opportunity cost for Mexico in producing 1 gallon of gasoline
• 5 lamps
The opportunity cost for Venezuela in producing 1 gallon of
gasoline
• ¼ lamps
The country with the comparative advantage in gasoline
• Venezuela
TRY THIS

11. Previously, Mexico can produce 500 lamps or 100 gallons of
gasoline while Venezuela can produce 25 lamps or 100
gallons of gasoline, both with 1 unit of resources. Now,
assume that Mexico and Venezuela each has 2 units of
resources, and each uses 1 unit for the production of lamps
and the other for the production of gasoline.
How many lamps to be produced by both in total?
How many gallons of gasoline to be produced by both in total?
If each country uses its 2 units of resources to produce the good
in which it has the comparative advantage:
What will Mexico produce, and how much?
What will Venezuela produce, and how much?
• 525 lamps
• 200 gallons of gasoline
• 1000 lamps
• 200 gallons gasoline
TRY THIS

12.  Goods and services can be exported and imported
by anyone in any country with no restrictions.
 Arguments for Free-Trade :
i. Trade, Specialization, and Efficiency
 Permits the markets in which goods and services
are bought and sold to expand, and this increase
will lead to more specialization.
 Specialization leads to efficiency, and this allows
more goods and services to be produced.
FREE TRADE

13.  Arguments for Free-Trade :
ii. Increased Availability of Goods & Lower Prices
Leads to larger quantities of goods from which to
choose and to lower prices.
iii. Trade & Competition
Increases competition in markets and the price
therefore moves toward cost.
FREE TRADE

14. Protectionism view that it is in the best interest of a
country to restrict free trade.
Trade-Restricting Policies
i. Quota
ii. Embargo
iii. Tariff
PROTECTIONISM

15. PROTECTIONISM - QUOTA
Quota - Restriction or limit on the quantity of an item that can
be imported into a country to protect domestic industries so
that the demand for local products could be maintained
The Effects of an Import Quota
 Because the quota raises the domestic price above the
world price, domestic buyers are worse off, and domestic
sellers of the good are better off.
 License holders are better off because they make a profit
from buying at the world price and selling at the higher
domestic price.

16. Embargo - Ban on trade for a particular
commodity or with a particular country, normally
motivated by political, economic, moral or
environmental reasons
The Effects of embargo
 Reduce, and to some extend, zero imports –
exports of ban goods, or goods from banned
countries
PROTECTIONISM - EMBARGO

17. PROTECTIONISM - TARIFFS
Tariff - Tariffs are taxes on imported goods with the aim
to protect domestic industries
The Effects of a Tariff
 Tariffs increase the prices of imported goods, but the
domestic producers are not forced to reduce prices
 Tariffs raise the price of imported goods above and
thus reduces the quantity of imports

18.  Arguments for Protectionism
i. Protection of Infant Industries
 Government should impose trade restrictions to
protect an industry in the early stages of development.
ii. Protection of Domestic Employment & Output
 Trade restrictions reduce foreign goods competition in
domestic markets, increase employment and output in
the domestic markets.
iii. Diversification
 Prevents dependencies on foreign goods.
iv. National Security
 Diversification is needed in anticipation of possible
interruptions of foreign supplies.
PROTECTIONISM

19. TRADE AGREEMENTS
• Unilateral: when a country removes its trade
restrictions on its own.
• Multilateral: a country reduces its trade
restrictions while other countries do the same.

20. International Monetary Fund (IMF)
 Organization of 188 countries, working to foster
global monetary cooperation, secure financial
stability, facilitate international trade, promote high
employment and sustainable economic growth, and
reduce poverty around the world.
 Provides loans and other financial assistance to
countries
INTERNATIONAL MONETARY FUND (IMF)

21. European Union (EU)
 Single unified market formed by the majority of
Western European nations.
 Economic and political union of 27 member states
that are located primarily in Europe.
 Developed a single market through a standardised
system of laws that apply in all member states.
EUROPEAN UNION (EU)

22.  The North American Free Trade Agreement
(NAFTA) is an example of a multilateral trade
agreement.
 In 1993, treaty creates a unified market involving
the United States, Canada, and Mexico.
 NAFTA lowered the trade barriers among these
countries.
NAFTA

23. • The General Agreement on Tariffs and Trade
(GATT) refers to a continuing series of
negotiations in the international forum among
many of the world’s countries with a goal of
promoting free trade.
• GATT has successfully reduced the average tariff
among member countries from about 40% after
WWII to about 5% today.
 World Trade Organization (WTO) - Organization
founded in 1995 to take over responsibilities of
GAAT.
GATT & WTO

24. Justify in support of free trade.
• Specialization and Efficiency - more specialization
leads to efficiency, as this allows more of
specialized goods and services to be produced
• Availability of Goods with Lower Prices - larger
quantities of goods from which to choose and to
lower prices.
• Competition - increases competition in markets and
the price therefore moves toward cost.
TEST YOUR UNDERSTANDING