Chapter 5. International Trade
Link to syllabus
Skip the technical treatment of comparative advantage (pp. 130-134),
and the discussions of consumer and producer surplus (pp. 138-141),
and Figure 5-11 p. 146.
Figure 5.1 P. 128. The Growing Importance of
International Trade for the US
Description of the Theory of Comparative Advantage
• The theory says that free trade is the best policy
• Countries can maximize their ‘consumption’ (availability
of goods and services), because…
• They maximize their production, producing those things at
which they are most efficient (their comparative
advantage), and
• Theory assumes full employment
• Theory ignores distribution of benefits inside the country –
that’s another issue
Sources of Comparative Advantage (pp. 135-36)
•
•
•
•
Climate, availability of natural resources (oil)
Relative amounts of capital and labor – (Heckscher-Ohlin)
Technology
Note also the potential importance of returns to scale.
Curiously, although Krugman became famous for his work on
this topic, ‘strategic trade policy’ isn’t mentioned in his intro
text.
In addition, this model leads to the prediction that trade policies
will affect the distribution of income.
Figure 5-4, p. 137. Education, Skill Intensity, and Trade
Germany exports skill intensive products to the US, while
Bangladesh exports low-skill products; just as theory of
Comparative advantage predicts.
Figure 5-10 p. 145. The Effects of Creating a Tariff;
– initial situation is free trade at Pw.
This graph usually appears on the exam.
We will skip the discussion of Figure 5-11, p. 146.
Arguments for Protection
• National security
• Jobs
• Infant industry
• Or, straightforward Income Distribution – help one group,
don’t worry about hurting another.
Different textbook
U.S. Tariff rates, 1860-2005
New Europe Map: NYT Oct. 21, 2002
Map of Canada
Mexico map