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Comparative Advantage
Overheads
The Logic of Free Trade
Self-sufficiency is nice but …
Advantages of doing things ourselves
Good information about quality
Don’t need to depend on others and their foibles
Can customize the product
Can coordinate production and consumption
Can keep information secret
Don’t have to worry about enforcing any contracts
Don’t have to worry about being exploited
Will not have any transactions costs
Disadvantages of doing things ourselves
May not be able to achieve any economies of scale
May not have necessary knowledge, skill or intelligence for task
May have limited experience for some tasks
May have to keep continually changing tasks
Principle of specialization and exchange
Specialization and exchange enable us to enjoy
greater production and higher living standards
than would otherwise be possible.
As a result, all economies have been characterized by
high degrees of specialization and exchange.
The principle of specialization and exchange
applies not just to individuals,
but to groups of individuals,
such as those living within the boundaries that define
cities, counties, states or nations.
International Trade International trade is trade between nations
Exports are goods and services that are
produced domestically, but sold abroad.
Imports are goods and services that are
produced abroad, but consumed domestically.
Absolute and comparative advantage
An individual producer has an absolute advantage
in the production of a product if he has the ability
to produce the good or service using fewer resources
than other producers use.
Similarly a country has an absolute advantage
in the production of a product if it has the ability
to produce the good or service using fewer resources
than other countries use.
Comparative advantage
An individual producer has a comparative advantage
in the production of a product if she has the ability
to produce the good or service at a lower opportunity cost
than other producers.
Similarly, a country has a comparative advantage
in the production of a product if it has the ability
to produce the good or service at a lower opportunity cost
than other countries.
How to measure comparative advantage
We measure the opportunity cost of a good,
not by the resources used to produce it,
but rather by the other goods
whose production must be sacrificed.
Mutually Beneficial Trade
Mutually beneficial trade between any two countries
is possible whenever one country is relatively better
at producing a good than the other is at producing the good.
Being relatively better means having the ability
to produce a good at a lower opportunity cost —
that is, at a lower sacrifice of other goods foregone.
Measuring Productivity
We often measure productivity in terms of
output per unit of input (or other resource)
a.
labor time or hours
b.
land
c.
expenditure or cost
Labor time example
Labor requirement data for White House cleaning
Load of wash
Vacuum a room
Bill
.80 hours
.40 hours
Hillary
.75 hours
.25 hours
This data is input per unit of output
Convert requirement data to output per unit of input data
Take the reciprocal of the requirement data
hours
load

loads
hour
Bill
Loads per hour
1 / .80 = 1.25 loads
Rooms per hour
1 / .40 = 2.5 rooms
Hillary
1 / .75 = 1.333 loads
1 / .25 = 4 rooms
Corn and peanut example
Cost requirement data
Corn (bu)
Peanuts (lbs)
$2.50
$0.25
U.S.
Mexico
$ per output
$4.00
$0.50
Convert requirement data to output per unit of input data
Take the reciprocal of the requirement data
Bushels of corn per $Pounds of peanuts per $
U.S.
1 / 2.50 = 0.40 bu.
1 / .25 = 4 lbs.
Mexico
1 / 4.00 = 0.25 bu.
(1/4)
1 / .50 = 2 lbs
Corn and peanut example
Corn (bu)
0.40 bu
Peanuts (lbs)
4 lbs
U.S.
Mexico
Output per $
0.25 bu
2 lbs
How to determine who has the comparative advantage in what
Output per unit of input data
1.
Determine the output per per unit of input for each agent
2.
Make an opportunity cost table (agents by goods)
3.
For each good (column) choose a unit of exchange
4.
Determine the opportunity cost of each good in terms
of the unit of exchange by dividing the production of
the unit of exchange by the production of the other good
5.
The country with the lower opportunity cost has a comparative
advantage in the production of each good
Example Computation
Loads
Rooms
Loads
Rooms
Bill
1.25
2.5
Bill
2r
1/2 l
Hillary
1.33
4
Hillary
3r
1/3 l
3. Rooms is unit of exchange for wash
Wash is unit of exchange for rooms
4. Fill in comparative advantage table (unit of exchange per unit of good)
5.
Bill has the comparative advantage in washing
5a. Hillary has the comparative advantage in room cleaning
Example Computation
Corn
Peanuts
USA
0.40
4
USA
10 p 1/10 c
Mexico
0.25
2
Mexico
8p
Corn
Peanuts
1/8 c
3. Peanuts is unit of exchange for corn
Corn is unit of exchange for peanuts
4. Fill in comparative advantage table (unit of exchange per unit of good)
4
 10
0.40
2
 8
0.25
Example Computation
Corn
Peanuts
Corn
Peanuts
USA
0.40
4
USA
10 p 1/10 c
Mexico
0.25
2
Mexico
8p
1/8 c
3. Peanuts is unit of exchange for corn
Corn is unit of exchange for peanuts
4. Fill in comparative advantage table (unit of exchange per unit of good)
5.
Mexico has the comparative advantage in corn
5a. USA has the comparative advantage in peanuts
Determining comparative advantage
Using input per unit of output data
Using cost per unit of output data
Output per unit of input data
We want the most possible
Most output per unit of input
Input (cost) per unit of output data
We want the least possible
Least input per unit of output
What does Bill give up to do a load of wash?
Wash
Bill
0.8
Rooms
0.4
Hours per task
Hillary
0.75
0.25
Bill gives up 2 rooms to do a load of wash
1 load of wash costs two rooms
Washing takes twice the resources of rooms
Opportunity Cost of:
1 Load
2 rooms
Bill
Hillary
1 Room
What about Hillary?
Wash
Bill
0.8
Rooms
0.4
Hours per task
Hillary
0.75
0.25
Hillary gives up 3 rooms to do a load of wash
1 load of wash costs three rooms
Washing takes 3 times the resources of rooms
Opportunity Cost of:
1 Load
2 rooms
Bill
Hillary
3 rooms
1 Room
Who has the lowest opportunity cost for washing?
1 Load
1 Room
Bill
Hillary
2 rooms
3 rooms
Bill has a comparative advantage in washing
What does Bill give up to vacuum a room?
Loads
Bill
0.8
Rooms
0.4
Hours per task
Hillary
0.75
0.25
Bill gives up 1/2 load of wash to vacuum a room
1 room costs ½ load of wash
Vacuuming takes ½ as long as washing
Opportunity Cost of:
1 Load
1 Room
2 rooms
½ load
Bill
Hillary
3 rooms
What does Hillary give up to vacuum a room?
Wash
Bill
0.8
Rooms
0.4
Hours per task
Hillary
0.75
0.25
Hillary gives up 1/3 load of wash to vacuum a room
1 room costs 1/3 load of wash
Vacuuming takes 1/3 as long as washing
Opportunity Cost of:
1 Load
1 Room
2 rooms
½ load
3 rooms
1/3 load
Bill
Hillary
Bill has a comparative advantage in washing
Hillary has a comparative advantage in vacuuming
How to determine who has the comparative advantage in what
Input per unit of output data
1.
Determine the input per per unit of output for each agent
2.
Make an opportunity cost table (agents by goods)
3.
For each good (column) choose a unit of exchange
4.
Determine the opportunity cost of each good in terms
of the unit of exchange by dividing the input use of each good
by the input use of the unit of exchange
5.
The country with the lower opportunity cost has a comparative
advantage in the production of each good
Example Computation
Corn
Peanuts
Corn
U.S.
2.50
0.25
U.S.
Mexico
4.00
0.50
Mexico
Peanuts
10 p 1/10 c
8p
1/8 c
3. Peanuts is unit of exchange for corn
Corn is unit of exchange for fish
4. Fill in comparative advantage table (unit of good per unit of exchange)
5. Mexico has the comparative advantage in corn production
5a. U.S. has the comparative advantage in peanut production
Time for a break and review
Specialization and Gains from Trade
If individuals/countries specialize
according to their comparative advantage,
a more efficient use of given resources occurs.
As a result, the output of at least one good rises,
without decreasing that of any other good.
The rate of substitution between outputs
Loads
Bill
Rooms
2 rooms ½ load
Opportunity cost
Hillary
3 rooms 1/3 load
If Bill cleans 1 less room, he washes 1/2 more load of laundry.
(1 less room) x (½ load per room) = ½ more loads of laundry
If Bill cleans 2 less rooms, he washes 1 more load of laundry.
(2 less rooms) x (½ load per room) = 1 more loads of laundry
The rate of substitution between outputs
Loads
Bill
Rooms
2 rooms ½ load
Opportunity cost
Hillary
3 rooms 1/3 load
If Bill does 1 more load of laundry, he cleans 2 less rooms.
(1 more load) x (2 rooms per load) = 2 less rooms
If Bill does 2 more loads of laundry, he cleans 4 less rooms.
(2 more loads) x (2 rooms per load) = 4 less rooms
The rate of substitution between outputs
Loads
Bill
Rooms
2 rooms ½ load
Opportunity cost
Hillary
3 rooms 1/3 load
If Hillary does 1 more load of laundry, she cleans 3 less rooms
(1 more load) x (3 rooms per load) = 3 less rooms
If Hillary cleans 2 more rooms, she washes 2/3 less loads of laundry
(2 more rooms) x (1/3 load per room) = 2/3 more loads of laundry
Now adjust tasks and see what happens
Loads
Bill
Rooms
2 rooms ½ load
Opportunity cost
Hillary
3 rooms 1/3 load
Bill does 2 more loads of laundry and Hillary does 2 less loads
(2 more loads) x (2 rooms per load) = 4 less rooms (Bill)
(2 less loads) x (3 rooms per load) = 6 more rooms (Hillary)
Net impact is 2 more rooms vacuumed
Now adjust tasks and see what happens
U.S.
Corn
Peanuts
10 p
1/10 c
Opportunity cost
Mexico
8p
1/8 c
US grows 1,000 less bu corn and Mexico grows 1,000 more bu corn
(1,000 less bu corn) x (10 lbs per bu) = 10,000 more lbs of peanuts
(1,000 more bu) x (8 lbs per bushel) = 8,000 less lbs of peanuts
Net impact is 2,000 more lbs of peanuts
Another example
U.S.
Corn
Peanuts
10 p
1/10 c
Opportunity cost
Mexico
8p
1/8 c
US grows 10,000 less corn and Mexico grows 100,000 less peanuts
(10,000 less bu corn) x (10 lbs per bu) = 100,000 more lbs of peanuts
(100,000 less lbs) x (1/8 bushels per pound) = 12,500 more corn
Net impact is 2,500 more bushels of corn
A third example
U.S.
Corn
Peanuts
10 p
1/10 c
Opportunity cost
Mexico
8p
1/8 c
US grows 4,000 more corn and Mexico grows 40,000 more peanuts
(4,000 more bu corn) x (10 lbs per bu) = 40,000 less lbs of peanuts
(40,000 more lbs) x (1/8 bushel per pound) = 5,000 less corn
Net impact is 1,000 less bushels of corn
Oops!!
Helpful note on finding tradeoffs
The tradeoff in the US is 1 bushel corn for 10 pounds of peanuts
Suppose we produce 3,000 less bushels of corn in the US
How much will peanuts rise?
1 bu corn  3,000 bu corn
10 lbs peanuts
z lbs peanuts
 z lbs peanuts
1 bu corn  3,000 bu corn
10 lbs peanuts
 z lbs peanuts  3,000 bu corn 10 lbspeanuts
1 bushel corn
 z lbs peanuts  30,000 lbs peanuts
Helpful note on finding tradeoffs
The tradeoff in the Mexico is 1 bushel corn for 8 pounds of peanuts
Suppose we want 30,000 less lbs of peanuts
How much will corn rise?
1 bu corn 
x bu corn
8 lbs peanuts
30,000 lbs peanuts
1
bu
corn
 x bu corn 
30,000 lbs peanuts
8 lbs peanuts
 x bu corn  3,750 bu corn
If countries specialize
according to their comparative advantage,
a more efficient use of given resources occurs.
The world output of at least one good rises,
without decreasing that of any other good.
Gains from trade
With the opening of trade, there will be a
net increase in world output.
Therefore, international trade flows can be arranged
so that no country would have less of anything,
while each country would some of the gain in total output.
Opportunity cost
U.S.
Mexico
Corn
Peanuts
10 p
8p
1/10 c
1/8 c
Production
U.S.
Corn
Peanuts
Corn
Mexico
Peanuts
- 100
+ 1000
+ 100
- 800
U.S.
Mexico
World
Corn
Peanuts
- 100
+ 100
+ 1000
- 800
+ 200
+0
Gain from imports (+)
Loss from exports (-)
+ 100
-900
-100
+900
Gain
+0
+100
+0
+100
US imports 100 corn and exports 900 peanuts
900/100 = 9 so the US is trading 9 for 1
Opportunity cost
U.S.
Mexico
Corn
Peanuts
10 p
8p
1/10 c
1/8 c
Production
U.S.
Corn
Peanuts
Corn
Mexico
Peanuts
- 10
+ 100
+ 12
- 96
U.S.
Mexico
World
Corn
Peanuts
- 10
+ 12
+ 100
- 96
+4
+2
Gain from imports (+)
Loss from exports (-)
+ 11
-98
-11
+98
US imports 11 corn and exports 98 peanuts
98/11 = 8.909 the US is trading 8.909 for 1
Gain
+1
+2
+1
+2
Opportunity cost
U.S.
Mexico
Corn
Peanuts
10 p
8p
1/10 c
1/8 c
Production
U.S.
Corn
Peanuts
Corn
Mexico
Peanuts
- 40
+ 400
+ 45
- 360
U.S.
Mexico
World
Corn
Peanuts
- 40
+ 45
+ 400
- 360
+ 40
+5
Gain from imports (+)
Loss from exports (-)
+ 45
-360
-45
+360
US imports 45 corn and exports 360 peanuts
360/45 = 8 so the US is trading 8 for 1
Gain
+5
+40
+0
+0
As long as the opportunity costs differ,
specialization and trade can be beneficial to all involved.
This remains true regardless of whether the parties involved
are nations, state, countries, or individuals.
It remains true even if one party holds an all-around
absolute advantage or disadvantage.
Time for another break
Terms of trade
Opportunity cost
U.S.
Mexico
Corn
Peanuts
10 p
8p
1/10 c
1/8 c
Production
U.S.
Corn
Peanuts
Corn
Mexico
Peanuts
- 100
+ 1000
+ 100
- 800
U.S.
Mexico
World
Corn
Peanuts
- 100
+ 100
+ 1000
- 800
+ 200
+0
Gain from imports (+)
Loss from exports (-)
+ 100
-900
-100
+900
Gain
+0
+100
+0
+100
The US is trading 100 bu corn for 900 lbs peanuts
Terms of trade
The U.S. is exporting 900 pounds of peanuts and
importing 100 bushels of corn.
The US is exchanging 900 lbs peanuts for 100 bu corn
This exchange ratio is known as the terms of trade.
More formally, the terms of trade is the ratio at
which a country can trade
domestically produced products
for foreign-produced products.
The exchange ratio in this example is 9 to 1
(900/100) = 9
With different terms of trade, the benefits
of specialization and exchange would be
apportioned in different manner.
Bounds on the terms of trade
What is the most the US will pay for a bushel of corn
in terms of peanuts?
No more than what it can transform
peanuts into corn domestically.
Bounds on the terms of trade
What is the least Mexico will take for a bushel of corn
in terms of peanuts?
No more than what it can transform
corn into peanuts domestically.
Corn and Peanuts
Country
Opportunity Cost of a Bushel of Corn
US
1 bu. corn costs 10 lbs. of peanuts
What if Mexico asks for 15 lbs of peanuts per bushel?
What if Mexico asks for 5 lbs of peanuts per bushel?
Will Mexico ask only 5 lbs of peanuts for a bushel of corn?
Mexico
1 bu. corn costs 8 lbs. of peanuts
NO!!!
Bounds on the terms of trade
The U.S. will not trade peanuts for corn
for more than
10 pounds for 1 bushel
Mexico will not trade peanuts for corn at less than
8 pounds for 1 bushel
Another Little Break
Analysis of Comparative Advantage using PPF’s
Output Combinations of Peanuts & Corn - US
Peanuts
0
100,000
Corn
10,000
0
20,000
8,000
40,000
6,000
Corn
This is a linear PPF which we can see by plotting it
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
PPF_US
0
20000 40000 60000
80000 100000 120000
Peanuts
We can find the slope of the PPF using two of the points
In particular, use the first two points in the set
Corn
10,000
0
Peanuts
0
100,000
Δcorn
(10,000 0)

Δpeanuts
(0 100,000 )
10,000
1

 
100,000
10
The implication is that the US gains 1 corn for 10 peanuts
Corn
We can see this slope graphically
Δcorn
2,000
1

 
Δpeanuts

20,000
10
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
2
0
0
0
0
PPF_US
20000 40000 60000
-20,000
80000 100000 120000
Peanuts
The US produces 10,000 corn when it produces no peanuts
So the intercept in the line describing the PPF is 10,000
The equation for the PPF is then given by
corn = (- 1/10) peanuts + 10,000
Some example points
corn = (- 1/10) peanuts + 10,000
corn = (- 1/10) (20,000) + 10,000
corn = - 2,000 + 10,000
corn = 8,000
corn = (- 1/10) (40,000) + 10,000
corn = - 4,000 + 10,000
corn = 6,000
Given a change in peanuts we can get the change in corn
 corn = slope *  peanuts
 corn
Corn
8,000
Peanuts
20,000
6,000
40,000
 peanuts
 corn = (-1 / 10) * (40,000 - 20,000)
 corn = (-1 / 10) * (20,000)
 corn = -2,000
Corn
Graphically
Δcorn
4,000
1

 
Δpeanuts

40,000
10
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
PPF_US
4
0
0
0
0
20000 40000 60000
-40,000
80000 100000 120000
Peanuts
Now consider Mexico
Output Combinations of Corn & Peanuts - Mexico
Corn
8,000
0
Peanuts
0
64,000
6,000
16,000
3,000
40,000
2,500
44,000
The linear PPF
Corn
9000
8000
7000
6000
PPF_Mexico
5000
4000
3000
2000
1000
0
0
10000 20000 30000 40000 50000 60000 70000
Peanuts
We can find the slope of the PPF using two of the points
In particular, use the second two points in the set
Corn
0
6,000
Δcorn
Δpeanuts
Peanuts
64,000
16,000


(0  6,000)
(64,000  16,000)
6,000
48,000

1

8
The implication is that Mexico gains 1 corn for 8 peanuts
Graphically
Δcorn
2,500
1

 
Δpeanuts

20,000
8
Corn
9000
8000
7000
6000
5500
5000
4000
3000
PPF_Mexico
2
5
0
0
2000
1000
0
0
10000 20000 30000 40000 50000 60000 70000
-20,000
Peanuts
Mexico produces 8,000 corn when it produces no peanuts
So the intercept in the line describing the PPF is 8,000
The equation for the PPF is then given by
corn = (- 1/8) peanuts + 8,000
Given a change in peanuts we can get the change in corn
 corn = slope *  peanuts
 corn
Corn
6,000
Peanuts
16,000
2,500
44,000
 peanuts
 corn = (-1 / 8) * (16,000 - 44,000)
 corn = (-1 / 8) * (- 28,000)
 corn = 3,500
Combine the diagrams
Corn
Production Possibility Frontier
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
PPF_US
PPF_Mexico
0
20000
40000
60000
80000 100000 120000
Peanuts
Corn
Production Possibility Frontier
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
PPF_US
PPF_Mexico
0
20000
16000
40000
60000
80000 100000 120000
Peanuts
The US gets more peanuts for corn compared to Mexico.
Now consider some initial production point for each country
Country
Corn
Peanuts
US
6,000
40,000
Mexico
3,000
40,000
Total
9,000
80,000
Graphically we can see this point as follows
Corn
Production Possibility Frontier
6500
6000
5500
5000
4500
4000
3500
3000
2500
2000
1500
36,000
PPC_US
PPC_Mexico
US Corn
Mexico Corn
38,000
40,000
42,000
44,000
Peanuts
Now decrease US corn production by 1 unit
Corn
6001.5
Production Possibility Frontier
PPF_US
6001
6000.5
Initial Corn
Less Corn
6000
5999.5
5999
5998.5
5998
39,990 39,995 40,000 40,005 40,010 40,015 40,020
Peanuts
 peanuts = + 10
Now increase Mexican corn production by 1 unit
Corn
3002
Production Possibility Frontier
PPC_Mexico
3001
Initial Corn
More Corn
3000
2999
39,984 39,988 39,992 39,996 40,000 40,004
Peanuts
 peanuts = - 8
Putting it all together
Initial
Mexico
U.S.
Corn
3,000
6,000
Peanuts
40,000
40,000
Subsequent
Corn
Peanuts
3,001
39,992
5,999
40,010
Total
9,000
80,000
9,000
80,002
What have we learned?
By growing one less bushel of corn in the U.S.
and one more bushel in Mexico,
there is a net gain of 2 pounds of peanuts.
Now drop US corn production by 1000
Country
Corn
Peanuts
US
6,000
40,000
 corn = (-1 / 10) *  peanuts
-1000
= (-1 / 10) *  peanuts
-10000
= (-1 ) *  peanuts
10000
=  peanuts
Now increase Mexican corn production by 1000
Country
Corn
Peanuts
Mexico
2,500
44,000
 corn = (-1 / 8) *  peanuts
1000
= (-1 / 8 ) *  peanuts
8000
= (-1 ) *  peanuts
-8000
=  peanuts
Summarizing
Corn stays the same
In the US,  peanuts = 10000
In Mexico,  peanuts = -8000
In Total,
 peanuts
= 2000
Total Production
Country
Corn
Peanuts
US
5,000
50,000
Mexico
4,000
32,000
Total
9,000
82,000
Previously
Total
9,000
80,000
Consider a variety of alternative production points
Corn Peanuts Corn Peanuts Corn Peanuts Corn Peanuts
Mexico 3000 40000
39992
2502 39984
8000 0
US
6000 40000 5999 44010
5998 44020
1000 90000
Total
9,000 80,000 9,000 80,002 9,000 88,004 9,000 90000
2501
Corn stays the same, peanuts increase by 10,000
Practice Problem
Output Combinations of Cotton and Sugar
US
Cotton
Sugar
100,000
0
Cuba
Cotton
Sugar
30,000
0
0
25,000
0
15,000
Δcotton
(100,000 0)
slope for US 

 
4
Δsugar
(0 25,000)
slope for Cuba 
Δcotton
(30,000 0)

 
2
Δsugar
(0 15,000)
Practice Problem
Initial Outputs of Cotton and Sugar
US
Cotton
Sugar
Cuba
Cotton
Sugar
60,000
10,000
10,000
10,000
Final Outputs of Cotton and Sugar
US
Cotton
Sugar
Cuba
Cotton
Sugar
?
5,000
?
15,000
For the US
Δcotton  (slope) (Δsugar)  (
4) (
5,000)  20,000
For Cuba
Δcotton  (slope) (Δsugar)  (
2) (5,000)  
10,000
Outputs of Cotton and Sugar
US
Cotton
Sugar
Initial
60,000
10,000
Cuba
Cotton
Sugar
10,000
10,000
Final
80,000
5,000
0
15,000
Consumption beyond the frontier
Suppose terms of trade are 9 pounds of peanuts for 1 bushel of corn.
Any time the U.S. stops producing a bushel of corn,
it gets 10 pounds of peanuts.
It can trade 9 of these for a bushel of corn and have
1 left over to bring it outside the frontier.
Consumption beyond the frontier
Any time Mexico stops growing a pound of peanuts
it can produce 1/8 of a bushel of corn.
So if Mexico stops growing 8 pounds of peanuts,
it will have a bushel of corn to trade.
It can trade this for 9 pounds of peanuts and be better off.
If opportunity costs differ and countries specialize
according to their comparative advantage,
they can consume combinations of goods
that lie outside
their production possibilities frontiers.
As a result, both countries are better off
Turning potential gains into actual gains
Convert domestic currency into the foreign currency
and then compare prices.
Buy at the lowest price and sell at the highest price.
Exchange rates will adjust so that trade occurs.
Provisos
Costs of trading
Sizes of countries
Size of market
Market power
Increasing opportunity cost and a concave PPF
Barriers to trade
Sources of Comparative Advantage
Natural resources
Capital stock
Physical
Human
Experience
Objections to free trade
Alternative groups in society are made
better and worse off
Exports
Good for domestic producers
Bad for domestic consumers
Imports
Good for domestic consumers
Bad for domestic producers
Compensation principle
With free trade the gainers can compensate
the losers such that everyone is better off
Barriers to trade
Tariffs
Quotas
Clever rules