Key Terms
Globalization
The process by which the world becomes increasingly interconnected through sharing of ideas, cultures, goods, services,
Absolute advantage
A country can produce a given good using fewer resources than another country. More productive.
Comparative advantage
A country can produce a good at a lower opportunity cost than another country. This is what actually drives trade.
Result
Canada specializes in lumber and exports it; Venezuela specializes in oil and exports it. Both gain.
Before trade
9,000 shoes + 25,000 refrigerators. After specialization: 9,500 shoes + 28,500 refrigerators.
Protectionism
Government policies to reduce or block imports.
Tariff
A tax on imported goods. Makes imports more expensive; consumers shift to domestic substitutes.
Import quota
A numerical limit on the quantity of a product that can be imported. Example: Reagan administration's 1980s quota on Jap
Nontariff barrier
Rules, regulations, inspections, and paperwork that raise the cost or difficulty of importing. Examples: safety standard
Textile example
US textile and apparel jobs fell 42% from 2007 to 2012 (666,360 to 385,240) despite protective tariffs and quotas. Consu
Flat-panel display example
A 63% antidumping tariff on displays (which make up ~50% of laptop production cost) caused manufacturers to move product
Lesson
Tariff retaliation spirals destroy trade for everyone.
GATT (General Agreement on Tariffs and Trade)
Established 1947. Forum for nations to negotiate tariff reductions and lower trade barriers.
WTO (World Trade Organization)
Replaced GATT in 1995. Currently ~150 member nations.
Free trade agreement
Members allow each other's imports without tariffs or quotas.