1. What determines the goods a nation will export?

A nation exports those goods for which it has a comparative advantage over other nations-that is, those goods for which its opportunity costs are lower than the opportunity costs of other nations.

2. What are the sources of comparative advantage?

There are two major sources of comparative advantage: productivity differences and factor abundance. Productivity differences come from differences in labor productivity and human capital, and from differences in technology. Factor abundance affects comparative advantage because countries have different resource endowments. The United States, with a large amount of high-quality farmland, has a comparative advantage in agriculture.

Productivity differences and factor abundance explain most, but not all, trade patterns. Other sources of comparative advantage are human skills differences, product life cycles, and consumer preferences. Consumer preferences explain intraindustry trade, in which countires are both exporters and importers of a product. Some consumers prefer brands made in their own country; others prefer foreign brands.

3. Why do countries restrict international trade?

Most countries follow some sort of commercial policy to influence the direction and volume of international trade. Despite the costs to domestic consumers, countries frequently try to protect domestic producers by restricting international trade. Lobbying for trade restrictions is an example of the rent-seeking activities discussed in the chapter on government and public choice.

To help hide the special-interest nature of most trade restrictions, several arguments commonly are used. These include saving domestic jobs, creating fair trade, raising revenue through tariffs, protecting key defense industries, allowing new industries to become competitive, and giving increasing-returns-to-scale industries an advantage over foreign competitors.

4. How do countries restrict the entry of foreign goods and promote the export of domestic goods?

Several tactics are used for these purposes. Tariffs, or taxes on products imported into the United States, protect domestic industries by raising the price of foreign goods. Quotas restrict the amount or value of a foreign product that may be imported; quantity quotas limit the amount of a good that may be imported, and value quotas limit the monetary value of a good that may be imported. Subsidies, payments made by the government to domestic firms, both encourage exports and make domestic products cheaper to foreign buyers. In addition, a wide variety of other tactics, among them health and safety standards, are used to restrict imports.

5. What kinds of exchange-rate arrangements exist today?

At the present time, nations use a variety of exchange-rate arrangements, including fixed exchange rates, freely floating exchange rates, and managed floating exchange rates.