Principles of Economics - Microeconomics



  • 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.


Why is it good?

  • Increases combined world knowledge.

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

Comparative Advantage

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

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.


  • 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

Cost of protectionism