This post is going to go over what a trade war is and what may cause them. It will also briefly discuss why they are not a good idea in general. While most economists tend agree that free trade is good for total economic surplus (meaning on the whole, or considering everyone), there are always going to individuals that lose some surplus from trade. This post goes through an example of why domestic firms producing shirts are angry with the fact that they must compete with foreign firms, so they ask for the government to impose tariffs.

The following shows an example problem asking you to construct a PPF (production possibilities frontier), calculate comparative advantage and find what potential gains from trade can be had. Answers are written in italics. Note that various versions of this sheet are given to students and they are then asked to conduct mutually beneficial trades.

1)    (do by yourself)  You are your own economy, you have a production possibilities set described below (the PPF in this case will be linear, so the tradeoff (opportunity cost) is ___________ as you produce more and more of a good).
Constant

Cell Phones	T-Shirts
0	100
400	0

blank graph

 

Jimmy
Food	Wood
50	0
40	20
30	40
20	60
10	80
0	100

While most economists agree that globalization is good in the aggregate (meaning on the whole, or considering everyone), there are always going to individuals that lose from free trade and globalization (also called liberalization).    In this post we will go through an example of why domestic firms producing t shirts are angry with the fact that they must compete with foreign firms, so ask for government assistance in the form of tariffs.  A real world example of this battle is shown here looking at the economics of US and Canada's softwood timber market.

Now we have to determine who has the comparative advantage in each good. Luckily they both don’t have the same opportunity costs, otherwise there would be no potential for gains from trade. Lets look at papayas first:

US’s opportunity cost of a papaya is 3 apples.

Mexico’s opportunity cost of a papaya is ½ an apple.

So Mexico has the lower opportunity cost of producing a papaya so Mexico should specialize in papayas, and this leaves the US to specialize in apples. With both countries producing only what they have their comparative advantage in, the world economy now has more stuff.