In this chapter we have seen how international trade makes it possible for countries to improve on their domestic production possibilities.
A country that is operating on its production possibilities curve can obtain more of all goods by opening its markets to free international trade. Free trade allows nations to consume goods beyond their domestic production possibilities curves. If nations specialize in the production of goods and services in which they have a comparative advantage, total output increases. Free trade enhances production possibilities on a worldwide scale. It does not benefit everyone, however. Some workers and owners of other factors of production will be hurt by free trade, at least in the short run.
Contrary to the implication of the model of specialization based on comparative advantage, not all trade is one-way trade. Two-way trade in the same goods may arise from variations in transportation costs and seasonal influences. Two-way trade in similar goods is often the result of imperfect competition. Much trade among high-income countries is two-way trade.
The imposition of trade barriers such as tariffs, antidumping proceedings, quotas, or voluntary export restrictions raises the equilibrium price and reduces the equilibrium quantity of the restricted good. Although there are many arguments in favor of such restrictions on free trade, economists generally are against protectionist measures and supportive of free trade.
Argentina and New Zealand each produce wheat and mutton under conditions of perfect competition, as shown on the accompanying production possibilities curves. Assume that there is no trade between the two countries and that Argentina is now producing at point A and New Zealand at point C.
Assume that the world market for producing radios is monopolistically competitive. Suppose that the price of a typical radio is $25.
Suppose radio producers in Country A file a successful anti-dumping complaint against their competitors, and that the result is the imposition of a $10 per radio tariff on imported radios.