Trade

Benefits

• Trade makes people better off when preferences differ.
• Value to buyer > value to seller for a trade to happen.
• Specialization - boost productivity by creating skilled labour and information networks.
  • It is not possible to know everything about everything. Specialization reduces amount of knowledge required to succeed.
  • Developed countries have more combined knowledge than developing countries.

Globalization

Why is it good?

• Increases combined world knowledge.

Comparative Advantage - The more different we are from each other, the more we benefit from trade.

Opportunity cost

• Time and resources are finite.
• You want to maximize your payoff.

Summary

• In two country/person examples, trade makes everyone better off, but in larger examples some may be worse off.
• Comparative advantage applies to groups and individuals.
• Diversity is a strength when combined with trade.

Tariffs and Protectionism

Protectionism - economic policy of restraining trade through tariffs, quotas, or other regulations that burden foreign producer but not domestic.

Tariff - tax on import. Quota - Quantity restriction of import.

International trade

Effects of tariff that influence welfare

• Domestic consumption reduces.
• Domestic production increases.

Both of these reduce welfare because

• Domestic consumption reduces leading to lost gains from trade.
• Domestic production increases, leading to use of resources in products where they are not as valued under trade, leading to wasted resources.

Tariffs

• Increase price, create deadweight losses.
• Direct production from low-cost to high-cost.

Distribution of losses

• Bad for consumers.
• Good for domestic producers.
• Bad overall.

Arguments against international trade

Reduces domestic jobs

We pay for imports with exports!

• Trade moves jobs from import industries to exports.
• Wages increase on average due to comparative advantage.
• Problems do arise when low skilled jobs are lost and labour is not up skilled.

Child labour

• Child labour is a side effect of poverty.
• Restraining trade due to child labour will further increase poverty and put more children at risk.
• Trade however in the long run will increase wealth and reduce child labour.

National security

• Anything can be considered important for national security.
• Key industries at home - Maybe valid for very few industries. But supply chains for those are global and hence still difficult without trade.

Cost of protectionism