Lecture 1
Concepts in Trade

• Comparative advantage
• Gains from trade
• Pattern of trade
• Terms of trade
• Protectionism

• What is a country relatively more efficient at producing?

2. The gains from trade

• Country A gains from trading with Country B even if it (A) is less efficient at producing each good than Country B

• Countries gain from exporting goods that use locally abundant factors of production

• Trade opens up larger markets
  
  • Countries can specialize in certain varieties of goods and exploit increasing returns to scale in production

• Trade in factors of production
  • Labor and capital
  • Benefits countries as factors migrate to regions where they earn the highest return

3. The pattern of trade

• What does a country export, and what does it import?

3.1 Explanations

1. Climate

2. Differences in labor productivity

3. Differences in factor endowments

4. Pure happenstance (intra-industry trade)

4. Terms of trade

• Definition: Price of exports/Price of imports

• Represents amount of imports that can be bought by a country with one unit of exports

• Link between terms of trade and country's welfare?

5. Protectionism

• Barriers to free trade

• Import tariffs, quotas, VERs, export subsidies, antidumping duties