ECON 102 Lecture Notes - Lecture 9: North American Free Trade Agreement, Comparative Advantage, Import Quota
Document Summary
Country has a comparative advantage in a good if it produces the good at lower opportunity cost than other countries. Countries can gain from trade if each exports the goods in which it has a comparative advantage. Pw = the world price of a good, price that prevails in world markets. Small economy is a price taker in world markets. When a small economy engages in free trade, pw is the only relevant price. No seller would accept less than pw since you could sell the good for pw in the world markets. No buyer would pay more than pw since you could buy the good for pw in world markets. Whether a good is imported or exported, trade creates winners and losers but the gains exceed the losses. Producers sell to a larger market, may achieve lower costs by producing on a larger scale. Competition from abroad may reduce market power of domestic firms, which would increase total welfare.