International Trade: Why Even the Best Should Import
Comparative advantage, factor endowments, scale economies, tariffs, quotas, trade agreements, the balance of payments and exchange-rate regimes, through their most surprising lessons.
Try 3 questions
1. A country is more productive than its neighbor at making every single good. Does it still gain from trading with that neighbor?
- No, it can gain nothing from trading
- Yes, in goods where its edge is greatest
- Only if wages are equal in both places
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Answer: Yes, in goods where its edge is greatest
Gains come from comparative, not absolute, advantage: specializing where its lead is largest frees resources and both sides consume more.
2. What ultimately determines which goods a country has a comparative advantage in?
- Lower opportunity cost
- Larger total population
- Absolute productivity levels
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Answer: Lower opportunity cost
A country has comparative advantage in a good if producing it means giving up less of other goods than it would elsewhere.
3. One worker-day makes 10 cloth or 5 wine in country A, but 2 cloth or 2 wine in country B. Who has the comparative advantage in wine?
- Neither, since A is better at both
- Country B, giving up less cloth
- Country A, which makes more wine
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Answer: Country B, giving up less cloth
In A one wine costs 2 cloth, in B only 1 cloth, so B should make wine even though A is better at both.
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