Suppose there are several countries that are efficient at producing coffee beans

Table 15.1 Canada's Merchandise Trade Patterns 2018

Source: Adapted from Statistics Canada Table 12-10-0011-01

Table 15.2 Canadian Trade by Merchandise Type 2017

Source: Adapted from Statistics Canada Table 12-10-0002-01

Principle of comparative advantage states that even if one country has an absolute advantage in producing both goods, gains to specialization and trade still materialize, provided the opportunity cost of producing the goods differs between economies.

Figure 15.1 Comparative advantage – production

Canada specializes completely in Fish at 35, where it has a comparative advantage. Similarly, the US specializes in Vegetable at 8. They trade at a rate of 1:6. The US trades 3V to Canada in return for 18F.

Autarky denotes the no-trade situation.

Figure 15.2 Comparative advantage – consumption

Post specialization the economies trade 1V for 6F. Total production is 35F plus 8V. Hence one consumption possibility would be (18,5) for the US and (17,3) for Canada. Here Canada exchanges 18F in return for 3V.

Application Box 15.1 The one hundred mile diet

Figure 15.3 Intra industry trade

Hunda can produce either 100,000 of each vehicle or 40,000 of both in each plant. Hence production possibilities are given by the points A, Z, and B. Pre-trade it produces at Z in each economy due to trade barriers. Post-trade it produces at A in one economy and B in the other, and ships the vehicles internationally. Total production increases from 160,000 to 200,000 using the same resources.

Supply chain: denotes the numerous sources for intermediate goods used in producing a final product

Intermediate good: one that is used in the production of final output

Regional value content: requires that a specified percentage of the final value of a product originate in the economies covered in the Agreement.

Dynamic gains: the potential for domestic producers to increase productivity by competing with, and learning from, foreign producers.

Total factor productivity: a measure of how efficiently the factors of production are combined.

Application Box 15.2 Tariffs – the national policy of J.A. MacDonald

Figure 15.4 Tariffs and trade

At a world price of $10 the domestic quantity demanded is QD. Of this amount Qs is supplied by domestic producers and the remainder by foreign producers. A tariff increases the world price to $12. This reduces demand to

Dumping is a predatory practice, based on artificially low costs aimed at driving out domestic producers.

Figure 15.5 Subsidies and trade

With a world supply price of P, a domestic supply curve S, and a domestic demand D, the amount QD is purchased. Of this, Qs is supplied domestically and (QD–Qs) by foreign suppliers. A per-unit subsidy to domestic suppliers shifts their supply curve to

Figure 15.6 Quotas and trade

At the world price P, plus a quota, the supply curve becomes RCUV. This has three segments: (i) domestic suppliers who can supply below P; (ii) quota; and (iii) domestic suppliers who can only supply at a price above P. The quota equilibrium is at T, with price

Application Box 15.3 Cheese quota in Canada