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Chapter
33
International Trade,
Comparative Advantage,
and Protectionism
Prepared by:
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
CHAPTER 33: International Trade, Comparative
International Trade,
Comparative Advantage,
33
Chapter Outline
and Protectionism Trade Surpluses and Deficits
An Economic Consensus
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2 of 29
INTERNATIONAL TRADE, COMPARATIVE
ADVANTAGE, AND PROTECTIONISM
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
All economies, regardless of their size, depend to some extent on other economies and are
affected by events outside their borders.
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TRADE SURPLUSES AND DEFICITS
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
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TRADE SURPLUSES AND DEFICITS
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 5 of 29
THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
Specialization and free trade will benefit all trading partners (real wages will rise), even those
that may be absolutely less efficient producers.
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
TABLE 18.3 Total Production of Wheat and Cotton Assuming No Trade, Mutual
Absolute Advantage, and 100 Available Acres
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
FIGURE 18.1 Production Possibility Frontiers for Australia and New Zealand before Trade
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
TABLE 18.4 Production and Consumption of Wheat and Cotton after Specialization
PRODUCTION CONSUMPTION
New
New Zealand Australia Australia
Zealand
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
Trade enables both countries to move beyond their previous resource and productivity
constraints.
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
TABLE 18.6 Total Production of Wheat and Cotton Assuming No Trade and
100 Available Acres
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
TABLE 18.7 Realizing a Gain from Trade When One Country Has a Double Absolute Advantage
STAGE 1 STAGE 2
New Zealand Australia New Zealand Australia
Cotton 50 acres x 6 bales/acre 100 acres x 3 bales/acre 25 acres x 6 bales/acre 100 acres x 3 bales/acre
300 bales 300 bales 150 bales 300 bales
STAGE 3
New Zealand Australia
100 bushels (trade)
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
When countries specialize in producing goods in which they have a comparative advantage,
they maximize their combined output and allocate their resources more efficiently.
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
TERMS OF TRADE
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
EXCHANGE RATES
When trade is free—unimpeded by government-instituted barriers—patterns of trade and
trade flows result from the independent decisions of thousands of importers and exporters
and millions of private households and firms.
First, for any pair of countries, there is a range of exchange rates that can lead automatically
to both countries’ realizing the gains from specialization and comparative advantage.
Second, within that range, the exchange rate will determine which country gains the most
from trade. In short, exchange rates determine the terms of trade.
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
TABLE 18.8 Domestic Prices of Timber (Per Foot) and Rolled Steel
(Per Meter) in the United States and Brazil
UNITED STATES BRAZIL
Timber $1 3 Reals
Rolled steel $2 4 Reals
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THE ECONOMIC BASIS FOR TRADE:
COMPARATIVE ADVANTAGE
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
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TRADE BARRIERS: TARIFFS, EXPORT
SUBSIDIES, AND QUOTAS
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
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TRADE BARRIERS: TARIFFS, EXPORT
SUBSIDIES, AND QUOTAS
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
Economic Integration
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TRADE BARRIERS: TARIFFS, EXPORT
SUBSIDIES, AND QUOTAS
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
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FREE TRADE OR PROTECTION?
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
FIGURE 18.4 The Gains from Trade and Losses from the Imposition of a Tariff
Trade barriers prevent a nation from reaping the benefits of specialization, push it to adopt
relatively inefficient production techniques, and force consumers to pay higher prices for
protected products than they would otherwise pay.
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FREE TRADE OR PROTECTION?
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
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FREE TRADE OR PROTECTION?
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
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AN ECONOMIC CONSENSUS
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
Foreign trade and full employment can be pursued simultaneously. Although economists
disagree about many things, the vast majority of them favor free trade.
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REVIEW TERMS AND CONCEPTS
CHAPTER 33: International Trade, Comparative
Advantage, and Protectionism
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