POLI 12 Lecture Notes - Lecture 11: Absolute Advantage, Comparative Advantage
Lecture 11:
International Trade:
Trade is beneficial because you choose to participate in it. Both parties are made better off by that
exchange. There are two basic issues with trade: The surplus from the exchange is still an issue of
conflict, there’s a tension over who gets a surplus. The boundary the other side imposes is the
reservation cost.
Absolute Advantage:
Trade was attractive because you could specialize and everyone could do what they are good at. The
problem with absolute advantage is with comparative advantage, even if some place can do
everything better than you, it will pick something it’s distinctly better at, leaving you to do what
you’re relatively better at.
Countries can be labor-abundant or capital-abundant.
Why do all countries restrict trade:
Kinds of anti-competitive practices:
• Tariff: Tax on goods, imported goods, this is almost how all of the US gov generated revenue
because it was attractive, no one at home was begin taxed and practical because it’s easy to identify
• Quotas: You don’t generate any revenue but you set a limit. You can impose a policy on the other
party
• Nontarrif barriers: The broadest conception framework, they’re used extensively to protect
domestic manufacturers on the basis that you’re doing something good.
• Subsidies: Popular with most governments, to pay a firm extra money to make it more popular on
the world market
• Prohibition:
Barriers redistribute wealth from consumers and foreign producers to domestic producers.
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Document Summary
Trade is beneficial because you choose to participate in it. Both parties are made better off by that exchange. There are two basic issues with trade: the surplus from the exchange is still an issue of conflict, there"s a tension over who gets a surplus. The boundary the other side imposes is the reservation cost. Trade was attractive because you could specialize and everyone could do what they are good at. The problem with absolute advantage is with comparative advantage, even if some place can do everything better than you, it will pick something it"s distinctly better at, leaving you to do what you"re relatively better at.
