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Principles of Microeconomics
Unit 19 Overview: International Trade
19.1 Absolute and Comparative Advantage
19.2 What Happens When a Country Has an Absolute Advantage in All Goods
19.3 Intra-Industry Trade between Similar Economies
19.4 The Benefits of Reducing Barriers to International Trade

🛒principles of microeconomics review

19.4 The Benefits of Reducing Barriers to International Trade

Last Updated on June 25, 2024

International trade barriers can significantly impact economies. Tariffs, taxes on imported goods, increase prices for consumers and protect domestic industries. However, they can also reduce competition and efficiency, ultimately limiting consumer choice and economic growth.

Reducing trade barriers and expanding international trade offer numerous benefits. These include increased competition, wider product variety, economic growth, and improved international cooperation. Countries can specialize in their comparative advantages, leading to increased productivity and lower costs globally.

International Trade Barriers and Benefits

Tariffs

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  • Taxes imposed on imported goods increase prices for domestic consumers making imports less competitive compared to domestic goods
  • Higher prices due to tariffs reduce quantity of imports demanded as domestic consumers buy fewer imported goods and foreign producers sell fewer goods to the domestic market
  • Tariffs protect domestic industries from foreign competition allowing domestic producers to charge higher prices and reducing incentives to improve efficiency or quality

Reducing Trade Barriers

  • Increases competition in domestic markets encouraging domestic producers to improve efficiency and quality leading to lower prices for consumers
  • Expands consumer choice and variety giving access to a wider range of goods and services allowing consumers to benefit from comparative advantages of other countries (specialized products, lower costs)
  • Promotes economic growth and job creation by increasing export opportunities for domestic producers and stimulating demand for domestic goods and services in foreign markets
  • Enhances international cooperation and understanding fostering cultural exchange and diplomacy reducing the likelihood of trade disputes and political tensions

International Trade Expansion

  • Allows countries to specialize in producing goods and services with comparative advantages focusing on what they can produce most efficiently leading to increased productivity and lower costs of production
  • Enables countries to trade for goods and services they cannot produce efficiently by importing cheaper goods and services from other countries freeing up domestic resources to be used more efficiently in other industries
  • Increases the size of potential markets for domestic producers who can sell to consumers in other countries leading to economies of scale and lower average costs of production
  • Promotes the spread of technology and innovation across borders as countries learn from and adopt advanced technologies and production methods from trading partners encouraging domestic producers to invest in research and development to remain competitive

Key Terms to Review (11)

Economies of Scale: Economies of scale refer to the cost advantages that businesses can exploit by expanding their scale of production. As a company increases its output, its average costs per unit typically decrease due to more efficient utilization of resources, specialized equipment, and division of labor.
Specialization: Specialization refers to the process by which individuals, firms, or countries focus on producing a limited range of goods or services in which they have a comparative advantage, rather than trying to produce a wide variety of products. This concept is closely tied to the principles of division of labor and comparative advantage, and it plays a crucial role in the study of economics and international trade.
Comparative Advantage: Comparative advantage is an economic principle that describes the ability of an individual, business, or country to produce a particular good or service at a lower opportunity cost compared to another producer. It forms the basis for mutually beneficial trade between different entities.
Globalization: Globalization is the process of increased interconnectedness and integration of economies, societies, and cultures across the world. It involves the expansion of international trade, investment, and the exchange of ideas, technologies, and people between countries and regions.
Economic Interdependence: Economic interdependence refers to the interconnected nature of different economies, where the economic activities and well-being of one country or region are closely tied to the activities and well-being of others. This concept highlights the increasing global integration of production, trade, and financial systems, leading to a high degree of mutual dependence among nations.
Protectionist: Protectionism refers to government policies and actions aimed at shielding a country's domestic industries and markets from foreign competition through the use of trade barriers, such as tariffs, quotas, or other restrictions on imports. Protectionist measures are often implemented with the goal of protecting domestic jobs, industries, and economic interests from the perceived threats of foreign competition.
International Competition: International competition refers to the rivalry and interactions between businesses, industries, or economies of different countries as they compete for market share, resources, and economic dominance on a global scale. It is a crucial concept in the context of international trade and the benefits of reducing barriers to trade between nations.
Tariffs: Tariffs are taxes or duties imposed on imported goods and services. They are a form of trade barrier used by governments to protect domestic industries from foreign competition, generate revenue, or influence the flow of trade.
Free Trade: Free trade is an economic policy that allows countries to import and export goods without government interference, such as tariffs or quotas. It aims to promote the unrestricted flow of goods and services between countries, with the goal of increasing economic efficiency and growth.
Trade Liberalization: Trade liberalization refers to the reduction or elimination of barriers to international trade, such as tariffs, quotas, and other protectionist measures. This process aims to promote the free flow of goods, services, and capital across national borders, fostering greater economic integration and interdependence among countries.
Knowledge Transfer: Knowledge transfer refers to the process of sharing and disseminating information, skills, and expertise from one individual, group, or organization to another. It is a crucial aspect of learning, innovation, and productivity in various contexts, including academia, business, and international trade.
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