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• International trade is a field in economics that applies microeconomic models to help understand the international economy
• International trade is beneficial by exporting goods whose inputs of production are locally abundant and importing goods whose inputs of production are locally scarce
• International trade makes it possible for countries to specialize in producing fewer numbers of goods resulting in large-scale production's greater efficiencies
• International trade includes not only the trade of tangible goods but also international migration, international borrowing, and international lending
• Knowing how much to trade is important in international economics
• Basic supply-and-demand analysis of international markets is crucial
• Firm and consumer behavior are key aspects in international economics
• Market structures include perfectly competitive markets, oligopolistic markets, and monopolistic markets
• Effects of market distortions should be considered in international economics
• International policy coordination is essential in the international economy
• Sovereign nations are free to choose their own economic policies in the international economy
• Countries' economic policies affect each other in an integrated world economy
• Variances in goals between countries often lead to conflicts of interest
• If countries with similar goals fail to coordinate their policies, they tend to suffer losses
• International economics involves trade and money
• International trade analysis mainly revolves around real transactions in the international economy, including the physical movement of goods and/or tangible commitment of economic resources
• An example of an international trade issue is the conflict between the United States and Europe over Europe's subsidized exports of agricultural products
• International monetary analysis focuses on the monetary side of the international economy, including financial transactions such as foreign purchases of US dollars
• An example of an international monetary issue is the difference of opinion regarding the foreign exchange rate value of the dollar to float freely in the market or to be controlled by government intervention
• Key models in international economics include the Heckscher-Ohlin model, the Specific-Factors model, and the Ricardian model
• Important international organizations in international economics are GATT (General Agreement on Tariffs & Trade), the International Trade Organization, the International Monetary Fund, and the World Bank
• Basic reasons why countries engage in international trade:

  • Countries benefit from their differences by reaching an arrangement in which one does the things it does relatively well
  • Countries trade to achieve economies of scale, especially if each country produces only a limited range of goods
• The concept of comparative advantage:

  • David Ricardo suggested that countries should specialize by allocating their scarce resources to produce goods and services for which they have a comparative advantage
  • A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries
• Comparative Advantage:

  • The ability to produce a good at a lower opportunity cost than another producer
  • Opportunity Cost: Whatever must be given up to obtain some item, measures the trade-off between the two goods that each producer faces
• Production possibilities:

  • Any economy has limited resources, leading to trade-offs in production
  • To produce more of one good, the economy must sacrifice some production of another good
  • Production possibility frontier graphically illustrates the combinations of output that the economy can possibly produce given the available factors of production
• The gains from trade:

  • Country A can produce wine more efficiently by making cheese and trading it with Country B
  • Country B can produce cheese more efficiently by making wine and trading it
  • Trade allows countries to benefit from each other's comparative advantages
• Misconceptions about comparative advantage:

  • Myth 1: Free trade is beneficial only if your country is strong enough to stand up to foreign competition, fails to recognize trade is based on comparative advantage
  • Myth 2: Foreign competition based on low wages is unfair and hurts other countries, used to promote protectionist trade policies
  • Myth 3: Trade does not exploit a country, denying trade opportunities would keep poor people poor
• Adding transport costs and nontraded goods:

  • Specialization in the real international economy is not extreme due to the existence of more than one factor of production, protection of industries, and transportation costs
  • Introducing transport costs makes some goods nontraded, examples include services like haircuts and auto repair that cannot be traded internationally
• Specific Factors Model:

  • Developed by Paul Samuelson and Ronald Jones
  • Assumes an economy that produces two goods and can allocate its labor supply between the two sectors
  • Allows for the existence of factors of production besides labor
• Imagine an economy that can produce two goods, manufactures and food

  • Has three factors of production: labor (L), capital (K), and land (T for terrain)
• Manufacturers are produced using capital and labor (but not land)

  • Food is produced using land and labor (but not capital)
• Production Possibilities:

  • More labor employed in the production of manufactures leads to larger output
  • Diminishing returns: each successive person-hour increases output by less than the previous one
• Assumptions of the Specific Factors Model:

  • Two commodities X and Y
  • Two countries A and B
  • Land, labor, and capital are the three factors
  • Conditions of perfect competition in commodity and factor markets
• Trade and Relative Prices:

  • When the two countries open trade, they create an integrated world economy
  • World's relative supply of manufactures lies between the relative supplies of the two countries
• Income Distribution and the Gains from Trade:

  • Trade is a source of potential gain for everyone
  • A better way to assess the overall gains from trade is to ask if those who gain can compensate those who lose and still be better off themselves
• The Political Economy of Trade:

  • Optimal Trade Policy: government wants to maximize the welfare of its population
  • Income Distribution and Trade Politics: those who want trade limited are more effective politically than those who want it extended