Tuesday, November 1, 2016
Chapter 7: Comparative Advantage and the Gains from International
7.1 Canada and the International Economy
• Imports: goods and services bought (consumed) domestically but produced in other
• Canada spends about 1/3 of its expenditure from other countries.
• Exports: goods and services produced domestically but sold (consumed) in other
• Canada sells about 1/3 of its output in other countries.
• Canadian economy depends on international trade.
7.2 Comparative Advantage in International Trade
• Comparative Advantage: the ability of an individual, a ﬁrm, or a country to produce
a good at a lower opportunity cost than competitors.
• Opportunity Cost: the highest valued alternative that must be given up to
engage in an activity.
• Absolute Advantage: the ability to produce more of a good than competitors when
using the same amount of resources.
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7.3 How Countries Gain from International Trade
Autarky: a situation in which a country does not trade with other countries. (non-
• Terms of Trade: the ratio at which a country can trade its exports for imports from
other countries. (exchange rate - how much quantity of one good is exchanged for
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Why don’t we observe complete specialization?
Three Main Reasons:
1. Not all goods and services are traded internationally.
2. Production of most goods involves increasing opportunity costs.
• If a country devotes more workers to producing a good, the opportunity cost of producing more of
that good will increase, causing the country to stop short of complete specialization.
3. Tastes for products differ.
• Most products are differentiated. As a result, countries may each have a comparative advantage
in producing different varieties of a particular product.
Does anyone lose as a result of trade?
• Yes, some ﬁrms that produced the import are likely to lose their business to foreign
competitors. (Social, political debate)
What does comparative advantage come from?
Climate and natural resources
• e.g. producing tropical fruits
• Relative abundance of labour and capital
• highly skilled workers/sophisticated machinery (become very productive)
• the ability to develop new products vs. the ability to improve the processes
used to make existing pro