CHAPTER 34
(MACRO CHAPTER 19; MICRO CHAPTER 20)
World Trade Equilibrium
FUNDAMENTAL QUESTIONS
1. What are the prevailing patterns of trade between countries? What goods are traded?
OVERVIEW AND OBJECTIVES
The primary purpose of this chapter is to develop a model of international trade.
The unique feature of the chapter is the discussion of comparative advantage, which establishes the
After reading and reviewing this chapter, the student should be able to:
1. Determine major trading partners of selected countries.
2. List the top traded products.
KEY TERM REVIEW
absolute advantage
comparative advantage
terms of trade
226 Chapter 34: World Trade Equilibrium
LECTURE OUTLINE AND TEACHING STRATEGIES
I. An Overview of World Trade
A. The direction of trade: Most trade is done by the industrialized countries. The eastern trading
area countries account for the least trade.
B. What goods are traded? Fuels like crude petroleum account for the largest portion of all
traded goods.
II. An Example of International Trade Equilibrium
A. Comparative advantage: Countries can make gains through trade by exploiting their
comparative advantages in production.
Teaching Strategy: Work through this material carefully. Students often have difficulty
understanding the difference between absolute advantage and comparative advantage.
III. Sources of Comparative Advantage
A. Productivity differences: The Ricardian model holds that productivity differences account
for comparative advantage. Differences in productivity between countries are accounted for
by technological differences.
OPPORTUNITIES FOR DISCUSSION
1. Discuss the comparative advantage that your home region enjoys. Can you explain why the
comparative advantage exists?
Chapter 34: World Trade Equilibrium 227
ANSWERS TO EXERCISES
1. If voluntary exchanges were not mutually beneficial, countries simply would not trade because
they would have nothing to gain.
2. Canada has the absolute advantage in beef production.
3. Japan has the absolute advantage in computer production.
7. The international equilibrium price is $30, and 10,000 shoes will be traded.
8.
a. If the United States has higher productivity in computer production relative to other
countries, it will also have lower costs and a comparative advantage in computer production.
b. Because the United States has abundant capital, it will have a comparative advantage in the
9. This phenomenon is explained by the existence of preferences in the United States for Japanese
computers and preferences in Japan for computers produced in the United States.
10. They mean that the prices that they receive for their exported goods are lower than they would
will be identical. Hence, there will be no trade.
ANSWERS TO STUDY GUIDE HOMEWORK
1. An absolute advantage is derived from one country having a lower absolute input cost of
producing a particular good or service. A country has a comparative advantage in the production
228 Chapter 34: World Trade Equilibrium
5.
a. The article states that the Chilean mines are so huge and cost-efficient that they could
survive low prices that would drive mines in other countries out of business. This suggests
that Chile can produce copper with the least input cost, so it has an absolute advantage in
ACTIVE LEARNING EXERCISE
This exercise will insure that students have a grasp of the concepts of absolute and comparative
advantage, as well as the terms of trade. Similar to the exercises in Chapters 2–6, this exercise uses the
team approach to allow students to discuss with each other the sometimes difficult concepts presented
in the chapter. Be sure to remind students to think in terms of opportunity costs.
Divide the class into groups of four. Each group is then further divided into groups of two. In each
group, two students are representatives of India, and two students are representatives of China. Using
the following table, the representatives of each country must determine what they should export and
import. They should also determine the terms of trade: when they would be willing to trade with the
other country. After they determine these answers, the groups of two then meet in the groups of four to
compare their answers. Any inconsistent answer should be reported to the instructor so that it can be
discussed by the class.
Amount of Cloth or Pair of Sunglasses Produced
by One Worker in a Day
India
China
Cloth
4
3
Pair of
Sunglasses
1
2
Answer: India has the absolute advantage in cloth production, and China has the absolute advantage in