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International Trade
Imports are the goods and services that we buy
from people in other countries.
Exports are the goods and services we sell to
people in other countries.
Trade in Services
International trade in services such as travel,
transportation, and insurance is large and growing.
Geographical Patterns of International Trade
Canada trades with countries all over the world, but its
biggest trading partner is the United States, which buys 82
percent of our exports and sells us 71 percent of our
imports.
The European Union is our second largest trading
partner with 10 percent of our exports and 14 percent of
our imports.
Comparative Advantage
A nation has a comparative advantage in
producing a good when it can produce it at a
lower opportunity cost than its trading partner.
Suppose two nations produce fish and milk. The
one that gives up less fish per liter milk than the
other has a comparative advantage in milk
production.
But then the other gives up less milk per pound
of fish produced, so it has a comparative
advantage in fish production.
Absolute Advantage
A nation has an absolute advantage
in producing a good when it can
produce more output from the same
quantity of inputs as its trading
partner.
Fish pounds
20
16
12
10
Trade
Country A gives up 1 pound of fish for 1
liter of milk.
The other gives up 2 pounds of fish for 1
liter of milk.
The first should produce milk, the second
should produce fish.
TRADE
Note: if A gives up producing 5 fish, output
goes up by 5 liters of milk. If B gives up
producing 5 fish, output goes up by a little
more than 2 liters of milk.
If A and B are using the same inputs, B
has an absolute advantage in both fish
and milk. As a result its richer. But the
best A can do is sell milk to B and buy fish.
TRADE
A is better off to produce milk and trade with B,
as long as B pays more than 1 fish per liter of
milk.
B is better off to produce fish and trade with A.
They could get up to 1 liter of milk per pound of
fish through trade, instead of a liter through
production.
Often, prices end up nearer the opportunity cost
of the big nation than the small nation.