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International Trade
12
IN THIS CHAPTER
Summary: Economists agree on few things, but one of the few unifying
themes in economics is that free and fair trade between two nations is mutu-
ally beneficial. Chapter 12 begins by reviewing the concept of comparative
advantage and gains from trade, and the difference between the domestic
and world price of a good. This chapter also revisits the currency exchange
markets to illustrate how trade between nations requires the trade of cur-
rency and the connection of monetary policy to foreign exchange rates.
Lastly, we look at the economic impact of trade barriers.Key Ideas
✪ Comparative and Absolute Advantage
✪ Specialization and Gains from Trade
✪ Balance of Payments
✪ Foreign Exchange
✪ Trade Barriers12.1 Comparative Advantage and Gains from Trade
Main Topics: Comparative and Absolute Advantage; Gains from Trade; Exports, Imports, and
the World Price
Chapter 5 of this book introduces, albeit from the microeconomic perspective, the concept
of production possibility curves. Comparative advantage and specialization at the micro-
economic level explains why brain surgeons do not fly 747s and pilots do not analyze CAT
scans. At the macroeconomic level, the law of comparative advantage says that nations can
mutually benefit from trade so long as the relative production costs differ.KEY IDEAKEY IDEACHAPTER