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Week 6: International trade

This week we only introduce one new topic, international trade. Of course this is only a brief introduction – the field of international economics is a large part of modern economics.

We make the simplifying assumption that the country in question is ‘small’ – it’s activities in buying or selling goods or services do not influence world prices which are therefore given to it. In fact it turns out that this assumption is innocuous for countries like Australia which can probably only influence world prices for a few goods – perhaps wool, iron ore and perhaps coal.

We argue three points for a ‘small country’:

1. Countries sell things they have a comparative advantage in and buy things they have a comparative disadvantage in. This elaborates an earlier theme – it pays to specialise in producing the goods where comparative advantage lies – in short where opportunity costs are low. It pays to take advantage of the comparative advantages of others by buying goods from them.

2. A shift towards allowing free trade provides positive benefits for some and net costs to others but overall society gains social surplus from trade. International trade provides a group of buyers and sellers in a community with more options and hence net overall advantage even though some may lose.

3. Restricting imports by means of tariffs or quotas reduces the gains from those achievable with free trade but – provided some trade occurs – there are still gains from trade. Thus restricted trade is better than no ntrade but maximum gains are realised by completetely free trade. Trade restrictions are like placing a wall or barrier between groups of people seeking to do deals – while some groups may gain there is an overall social loss since the size of markets has fallen.

These are fascinating propositions that have been well-understood to economists from the time of Adam Smith and David Ricardo. In a sense they are simple ideas but they are widely disbelieved by many citizens and by some foolish politicians.

The hard work in this unit involves modifying the supply/demand diagrams you have learnt to illustrate how the pattern of trade is determined, the gains from trade and the deadweight losses from restrictions on imports.

I am not an international economics expert but the area of trade has fascinated me for more than 20 years. La Trobe University’s Department of Economics and Finance has some superb units that focus on trade taught by eminent scholars such as Dr Robert Waschik and Professor Sisira Jayasuriya. I hope this single class introduction to the field of international trade wets your appetite for further study in this area.

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