1. An Overview of World Trade

1. Comparative advantage allows countries to make gains through trade by exploiting their comparative advantages in production.
   
   Teaching Strategy: Work through this material carefully. Students often have difficulty understanding the difference between absolute and comparative advantage.
   
   
2. Sources of comparative advantage
   
   

• Productivity differences: The Ricardian model holds that productivity differences account for comparative advantage. Differences in productivity between countries are accounted for by technological differences.
  
  
• Factor abundance: The effect of factor abundance on comparative advantage is described by the Heckscher-Ohlin model.
  
  
• Other theories of comparative advantage: We can expand our understanding of comparative advantage by taking into account the impacts of varying endowments of human skills, product life cycles, and the preferences of consumers.
  
  

2. International Trade Restrictions

1. Arguments for protection
   
   Teaching Strategy: You may find it interesting to divide your class into two sides and have each side develop arguments either for or against protectionism.
   
   

• Keeping domestic jobs is one of the benefits of protectionism, many people argue. This may be true in a protected industry, but the cost of protectionism exceeds the benefits for the economy as a whole.
  
  
• Creation of a level playing field, rather than having foreign governments place unfair restrictions on imports, is another basis for calls for protectionism. Thus, advocates of creating a level playing field argue that domestic policymakers should react to foreign restrictions with those of their own.
  
  
• Government revenue creation by using tariffs is a method used by many developing countries.
  
  
• National defense
  
  
• Infant industriesnew and emerging industriesare often protected until they are able to compete with foreign counterparts that are more established.
  
  
• Strategic trade policy may be appropriate for governments to use in industries with decreasing costs.
  
  

3. Tools of policyBR>
Teaching Strategy: Ask your students to develop a commercial policy that minimizes the economic costs of protectionism.

• Tariffs increase the price paid by consumers and the quantity of domestic production when a government imposes them.
  
  

Teaching Strategy: Point out that a tariff results in consumer surplus being transferred to the government.

• Quotas keep prices above their world levels and restrict the quantity of goods that can be consumed.
  
  

Teaching Strategy: Point out that a quota results in consumer surplus being transferred to the foreign producers of the good in question.

• Other barriers to trade include subsidies and government procurement, as well as health and safety standards.
  
  

4. Exchange Rate Systems and Practices
Teaching Strategy: Separate the students into two groups and let one group be Europeans and the other Americans. Ask each group to provide arguments for the benefits and disadvantages of the euro, the single European currency, for their own group. Discuss the results.