Chapter Nineteen: Module Summary -- International Trade

• There are a variety of reasons that a nation can use to justify trade protection. We want to know which reasons are valid and which are used to promote the interests of a few at the expense of many.

• A tariff is a tax on an import.

• A tariff shifts the supply curve for the imported product to the left and shifts the demand curve for the domestic good to the right.

• A quota is a quantity restriction on an import.

• A quota is represented as a vertical line at the quantity limit. Quotas raise the price of the imported good, and they shift the demand curve for the domestic good to the right.

• A nation has a comparative advantage in those products that it can produce the least inefficiently compared to production in other nations.

• A nation has an absolute advantage if it can produce more of a good or service than another nation given a fixed amount of resources.

• International trade patterns are determined by comparative advantage.

• Free trade raises the consumption possibilities of both nations involved in trade.

• There are few good economic justifications for trade protection, though there are some good noneconomic reasons. Human rights, political tit for tat, national security, and environmental and labor regulations are a few such reasons that trade might be protected. However, we must be careful to avoid protectionism just to save US jobs. Such a policy is very inefficient and costly to US citizens.

• NAFTA is the North American Free Trade Agreement between the US, Canada, and Mexico, implemented in 1994.