Question: Q & A for International Trade questions for Asarta and Butters (AB)

1. What is export, import, and net export?

Export means a country sells goods to other countries.

Import means a country buys goods from other countries.

Net Export = Export – Import (Always use export – import, never switch them around)

Since not every country exports more goods than it imports or vice versa, this leads to the discussions of question #2 below.

1. What is trade surplus, trade deficit, and trade balance?

If a country’s export is greater than its import, then that country has a trade surplus.  For example, China exports more goods to other countries than it imports from other countries.  Therefore, China has a big trade surplus now.

If a country’s export is smaller than its import, then that country has a trade deficit.  For example, United States imports more goods from other countries than it exports to other countries.  Therefore, United States has a big trade deficit now.  This is also the main reason for the trade war between the United States and China for the past few years.

If a country’s export is equal to its import, then that country has a trade balance.  It is difficult to think of any country has a trade balance now.

1. What are net exporter and net importer?

If one country sells more of one specific good to other countries than it buys that good from other countries, the country is a net exporter.  For example, although United States has a big trade deficit now, United States sells more jumbo passenger jets to other countries than it buys from other countries.  We can say United States is a net exporter of jumbo passenger jets regardless of its overall trade status.  Similarly, Columbia is a net exporter of coffee; Saudi Arabia is a net exporter of oil, etc.

If one country buys more of one specific good from other countries than it sells that good to other countries, the country is a net importer.  For examples, although China has a big trade surplus now, China buys more grains from other countries than it sells to other countries.  We can say China is a net importer of grains regardless of its overall trade status.  Similarly, United Kingdom (UK) is a net importer of automobiles; Mexico is a net importer of dairy products, etc.

1. What are tariffs, quotas, protectionism, and free trade?

Tariffs are taxes on imported goods levied by the domestic government.  For example, United States has 30% tariff on imported solar panels from China and 20% tariff on imported washing machines from South Korea.  These tariffs took effect on January 23, 2018.

Quotas are quantity limits on imported goods set by the domestic government.  For example, United States has quotas on cars imported from Japan.  As a result, Toyota produces many cars in the United States now.

Protectionism is trade policies designed to protect domestic producers.  Tariffs and quotas are examples of protectionism.

Free trade means trade without any protectionism.  For example, there is free trade among European Union (EU) member countries.  That is why it is so difficult for the Brexit to take effect because UK wants to keep the free trade terms, but not subject to the EU rules.  EU does not allow UK to have both ways.

1. Who gain and who lose from tariffs and quotas?

Tariffs benefit domestic government and domestic producers, but hurt domestic consumers.  Why?  Domestic government collects tax revenue from tariffs; domestic producers face less competition and can sell more their washing machines or other products; domestic consumers must pay a higher price on imported goods such as washing machines from South Korea due to the tariffs.

Quotas benefit domestic producers, but hurt domestic consumers.  Why?  Domestic government does not benefit from quotas because domestic government does not collect any tax revenue from quotas; domestic car producers face less competition and can sell more their automobiles; domestic consumers must pay a higher price on imported cars due to a limited supply of imported cars.

1. What is autarky, closed economy, and open economy?

Autarky refers to a country that is self-sufficient, but does not trade with other countries.  China was an autarky country before the 1970’s, but not now because it trades with many other countries.  Other than some very remote island countries in the Pacific Ocean, I cannot think of any country is an autarky country in the world today.

A closed economy refers to a country that does not trade with other countries.  North Korea was a closed economy in the 1950’s, but not now because it does some trade with China.  Again, I cannot think of any country is a closed economy in the world today.

The main difference between an autarky and closed economy is self-sufficiency.  An autarky must be both self sufficient and does not trade with other countries.  Closed economy only does not trade with other countries regardless whether it is self sufficient or not.  This means that all autarky countries are closed economy, but not all closed economies are autarky.

An open economy refers to a country that does trade with other countries.  All countries in the world are open economy now, including Cuba because it does trade with China, Russia, and Unites States.

1. What is the difference between absolute advantage and comparative advantage?

The important difference between absolute advantage and comparative advantage is the number of goods each one dealt with.  Absolute advantage deals with one good, either programming or sales.  One good at a time, not both goods together at the same time. 

Recall the Rose and Sam example we discussed in PPF lectures.  If we want to find who has absolute advantage in programming, we do not look at the sales.  Similarly, if we want to find who has absolute advantage in sales, we do not look at the programming.

Comparative advantage deals with two goods.  We want to compare the opportunity costs of producing two goods, so we must look at two goods together at the same time.

Again, recall the Rose and Sam example we discussed in PPF lectures.  If we want to find who has comparative advantage in programming, we must calculate the opportunity cost of both goods, programming and sales.  And then compare the two opportunity costs.  Who has a lower opportunity cost in programming, we say that producer has a comparative advantage in programming.   Similarly, if we want to find who has comparative advantage in sales, we must compare the opportunity costs of programming and sales.  Who has a lower opportunity cost in generating sales, we say that producer has a comparative advantage in sales.  

1. Using the concepts of absolute advantage and comparative advantage to explain the story of Rose and Sam.

Please see the example of Rose and Sam in the PPF lecture notes.