ADMS 1010 Study Guide - Absolute Advantage, International Trade, United States House Committee On Oversight And Government Reform
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1. The exchange of goods and services between or among countries
2. Enables a country to specialize in those goods it can produce most efficiently
3. Enlarges the potential market for the good of an economy
4. Major force of economic relations among countries
5. It is an extension of governmental policy
6. Reason for trade
Reasons for Trade
1. Resources are not completely distributed across the globe
2. The climate and terrain of state
3. The skill of its labour force
4. Advantages of specialization
1. The settlement of the west
2. The building of the railway
3. The creation of high tariffs on import
Implications of National Policy
Foreign firms importing goods into Canada
o Disadvantaged by the tariff
o Free to invest in Canada and establish subsidiaries
Foreign firms able to open resources frontiers before Canadian firms
National policy made Canadian industries very attractive investments
Concentration of ownership and market power.
The Ricardian model
Two British economists, Adam Smith and David Ricardo
Adam Smith advanced the theory of absolute advantage of nations, while Ricardo
developed the comparative advantage of factor of production. It is based on the
nations will specialize in those areas that best suited to their productive capabilities
and will then exchange with other nations. In this model it can be shown that both
parties gain from trade, by specializing in those areas within which they have a
comparative adv. nations can produce more goods and services than they could
without exchange the surplus production created can then be uses to exchange with
other nations, for goods and services in which they have specialized.
It suggests that CA is based upon nations factor productivity. Rickards approach to
measure Productivity, Richard’s approach measured productivity in terms of one
An examination of unit labor costs and trade data shows that the R.Model is a
relatively predictor of a country’s capacity to produce goods and services and
exchange them through international trade
Importance of international trade
Some countries export only to expand their domestic market or to aid
economically sectors within the domestic economy.
Other countries depends on trade for a large part of their national income
and to supply goods for domestic consumption
Mercantilism – the goals of trade
To maximize its export to other nations while limiting imports and collect as
much wealth as possible.
The assumption was that trade is a zero-sum game where there is always
winners and losers.
Economic Benefits of Comparative Advantage
International trade leads to more efficient and increased world production
(best use of resources)
It result the expansion of markets (as specialization occurs, the need to trade
with other nations to have access to certain products increases)
It leads to growth in domestic employment (specialization leads to greater
It simulates the modernization and innovation of domestic companies (in
order to keep your CA over others, you need to stay at the forefront of
technological and innovative advances or risk losing your position.
Restrictions on International Trade
Canada dependence on natural resources
How should Canada determine the price of its Nat Res.?
Weighing increase current income and consumption against the possibility of
lower real income and consumption in the future of its cost increase
Opposition to export sales of natural resources.
Indirect Restrictions on Export
Policies of diversification on industrial products
The goal is to reduce dependence on income from exports if there is
fluctuations in export sales of commodities
To maintain a basic self sufficiency in essential commodities to avoid
dependence on other countries
National security concerns
Restriction on imports
1. A tariff or import duty is a tax
2. An “ad valorem” tariff is a tax as a percentage of the price of a good
3. A license fee is required to import specific a good
4. Quotations are limitation on the quantity of a good which can be imported
5. Combined with an import license so that the importer is paying a fee to
import a specific amount
6. More stringent restrictions
- embargo, sanction, boycott.
Protectionism – Gov’t actions and policy that restrict or restrain international trade
often done with the intent of protecting local business and jobs from foreign
competition. Even in the most right wing of companies gov’t will inevitably choose
to intervene to protect what they perceive is in the nations interest. It also refers to
gov’t policy that protects its produces from foreign competition.
How does protectionism work?
There should be a degree of intervention and some persuasion and manipulation of
the tax system. The awarding of gov’t contracts, granting subsidies, and tax
Trade Restrictions as Protectionism
1. To protect foreign industry from foreign competition
2. Tariff imposed by the importing country when a good crosses an
3. Non-Tariff barriers refer to any action other than a tariff that restrict
international trade for ex. Quota, licensing, and regulations. Theses can be
worse than tariff barriers.
Effects of a protective tariff against Canada
Producer depend on protection cannot normally export since their costs are
often above world prices.
We depend almost entirely on domestic market.
Economic Losses from tariff often exceeds their benefits
It leads to the substitution of higher costs with domestic products and lower
Increase in economic rents, which is economic rents, are “excess returns”
above “normal levels” that take play in competitive markets.
Stable Thesis of Harold Innis
1. Asserted the origins and purposes of the federal gov’t can be understood in
terms of an economic territory dependence upon the exports of certain
2. To make it commercially feasible production entail heavy public
expenditures on railways and canals
3. The gov’t filled an important vacuum by being the substitute for a private
enterprise in the building and developing Canada.
4. Thomas Hockin later argues that the Canadian gov’t was given an active roll
in national development and fostering and protecting of certain cultural and