Free Trade Theory

1. Free Trade Theory Why Nations Trade

2. Basics of Trade • Defined: 2 Countries engage in economic activity • Exports: goods/services leave country • Imports: goods/services enter country • Trade Surplus: Exportmore than import • Trade Deficit: Import more than export

3. Why Trade?

4. Ways to Limit Trade • Tariffs– taxes on imports • Quotas- limits on quantity imported • Protectionism: Gov’t policy which seeks to limit trade • Globalization: the “global” movement towards free trade • Trade without Tariffs & Quotas • free market capitalism on a global scale

5. Specialization Works! • In his 1776 book Wealth of Nations, Adam Smith talked about worker specialization If each worker made their own pins, they produced only 20 pins per day Adam Smith noted that when each worker specialized in only one production stage, output increased to 4,800 pins per worker (Page 11, Wealth of Nations) Specialization also known asDivision of Labor

6. Finding YOUR Full Potential You will eventually SPECIALIZE in one field and TRADE for everything else!

7. Idaho Florida Texas Nevada Specialization works! + Any illegal activity you can think of…

8. David Ricardo • In his 1816 book David Ricardodeveloped the free trade theory based on comparative advantage • Absolute Advantage: when a country can produce a good more efficiently • produce a good using fewer resources • Comparative Advantage: when a country can produce a good at a loweropportunity cost • country gives up less when they produce a good

9. Here is my great theory! Ricardo’s Trade Theory • Countries should produce (specialize) in goods where they have a comparative advantage • Trade benefits both parties (each country gets “more”) • Free Trade promotes a more “efficient” world economy • Absolute Advantage is not relevant in deciding which country should produce a good

10. Free Trade Theory Video (6 minutes) https://www.youtube.com/watch?v=KDiL1HKFmDc

11. Free Trade Worksheet • Handout #1