Why does Mexico sell cars, avocados, and beer abroad while buying gasoline, machinery, and technology? It is not just that a country has too much of one thing and too little of another: there is an economic logic, specialization, that explains why trade benefits even countries that could make everything themselves.
Absolute and comparative advantage
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The country Vega produces wheat with half the labor of Olma, and Olma produces wine with half the labor of Vega. a) Explain what absolute advantage is and who has it for…
The country Vega produces wheat with half the labor of Olma, and Olma produces wine with half the labor of Vega.
a) Explain what absolute advantage is and who has it for each product.
b) Reason why both countries can benefit if they specialise and trade with each other.
The figure shows the exports and imports of an imaginary country over three years, in billions of pesos. a) Calculate the trade balance for each year. b) In which years…
The figure shows the exports and imports of an imaginary country over three years, in billions of pesos.
a) Calculate the trade balance for each year.
b) In which years was there a deficit, and in which years a surplus?
Explain the difference between free trade and protectionism. Then solve: a pair of imported sneakers costs $\$1\,000$ and the country applies a tariff of $20\ \%…
Explain the difference between free trade and protectionism. Then solve: a pair of imported sneakers costs $\$1\,000$ and the country applies a tariff of $20\ \%$, what final price do consumers pay?
A European country imposes tariffs on imported steel to protect its steel mills. a) Analyze the winners and losers within the country: steelmakers, car manufacturers,…
A European country imposes tariffs on imported steel to protect its steel mills.
a) Analyze the winners and losers within the country: steelmakers, car manufacturers, consumers, and the Treasury.
b) How might the affected exporting country respond, and what risk of escalation exists? Explain what a trade war is.
Regional integration and Mexico's trade agreements
Mexico is one of the most open economies in the world. It has free trade agreements with dozens of countries. The main one is the USMCA (with the United States and Canada, which replaced NAFTA in 2020); it also takes part in the CPTPP (Trans-Pacific Partnership) and has agreements with the European Union, among others. The USMCA is a free trade area: each country keeps its own tariffs toward third countries and requires rules of origin (a minimum percentage of regional content, for example in cars) for a product to move across borders without a tariff.
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Explain what belonging to the European Single Market means for a Spanish company when selling to France compared to selling to a country outside the EU. Mention tariffs,…
Explain what belonging to the European Single Market means for a Spanish company when selling to France compared to selling to a country outside the EU. Mention tariffs, common standards, and the free movement of goods.
An exporter from Valencia sells oranges to Germany and to a country outside the eurozone. a) Explain what advantages the euro gives it when selling to Germany. b) What…
An exporter from Valencia sells oranges to Germany and to a country outside the eurozone.
a) Explain what advantages the euro gives it when selling to Germany.
b) What additional problem does it face when selling to the other country? Explain what exchange rate risk is.
In Mexico, the maquila (assembly-for-export) industry and the automotive industry of the Bajío and the north are clear examples: components are imported, assembled here, and the finished product is exported. Today many companies practice nearshoring: moving production to countries close to the final market (for example, from Asia to Mexico) to gain supply security and reduce delivery times.
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A textile company in Puebla cannot match the prices of clothing imported from countries with very low wages. a) Analyze which strategies it can use to survive without…
A textile company in Puebla cannot match the prices of clothing imported from countries with very low wages.
a) Analyze which strategies it can use to survive without competing on price (quality, design, speed, branding).
b) Would you defend a tariff on imported clothing? Argue the pros and cons.
Analyze the following statement: "International trade increases the overall economic pie, but the way it is distributed can ruin entire regions." a) Drawing on the…
Analyze the following statement: "International trade increases the overall economic pie, but the way it is distributed can ruin entire regions."
a) Drawing on the comparative advantage model and the imperfect mobility of labor, justify why trade liberalization can simultaneously generate net gains at the macroeconomic level and prolonged structural unemployment in single-industry regions (for example, regions dedicated to ceramics or footwear).
b) Design a package of two economic policies to compensate workers harmed by import competition without resorting to protectionist barriers. Assess the budgetary difficulties of financing these policies with taxes collected from the domestic exporting sectors that have gained from trade.
Trade increases total wealth, but it does not distribute it equally. Exporters and consumers who gain access to cheaper products win; producers who cannot withstand foreign competition lose jobs. That is why a country can grow richer overall and, at the same time, leave entire regions or sectors behind.
Back to the beginning: Mexico exports cars and avocados because its opportunity cost of producing them is lower than in other countries (comparative advantage), and it imports what would cost it many more resources to make. With trade it gains overall, although distributing those gains requires public policies.
Summary
Let's practice! 3 medium exercises in this section