2. International Trade
b. describe benefits and costs of international trade;
c. distinguish between comparative advantage and absolute advantage;
d. explain the Ricardian and Heckscher-Ohlin models of trade and the source(s) of comparative advantage in each model;
What are the five benefits of international trade?
1. International trade and specialization result in lower prices and higher domestic consumption for imported products, and higher prices and lower domestic consumption for exported products.
2. International trade permits the residents of each nation to concentrate on the things they do best (produce at a low cost) while trading for those they do least well.
3. Industries experience greater economies of scale.
4. Households and firms have greater product variety.
5. Resources are allocated more efficiently.
What are the two costs (drawbacks) of international trade?
1. International trade may result in the loss of jobs in developed countries.
2. The potential for greater income inequality increases.
What is comparative advantage?
Comparative advantage is the ability to produce a good at a lower opportunity cost than others can produce it. Relative costs determine comparative advantage. If each country has a comparative advantage in producing a specific good, international trade will lead to mutual gain. Comparative advantage results in an expansion of total output.
What is the difference between comparative advantage and absolute advantage?
Comparative advantage is the ability to product a good at a lower opportunity cost. Absolute advantage is because of greater capability (cheaper labor, more resources, etc).