International Trade: Comparative Advantage, World Prices, and Tariffs

Objectives

• Students will be able to calculate opportunity costs from an output or input table and determine which country has comparative advantage in each good.
• Students will be able to identify a range of terms of trade that benefits both countries, between the two opportunity costs.
• Students will be able to predict whether a country imports or exports a good by comparing the world price to the autarky price.
• Students will be able to analyze the four effects of a tariff (higher domestic price, more domestic production, less consumption, fewer imports) and locate tariff revenue and the two deadweight loss triangles.
• Students will be able to explain how a tariff and a quota differ in who captures the price markup, government revenue versus quota rents.

Materials (all free, no student accounts needed)

• Lesson: International Trade
• International trade graph sandbox
• International trade practice quiz
• Full practice test bank
• CED Topic 1.3: Comparative Advantage
• CED Topic 6.1: Balance of Payments

Five-minute warm-up, no prep

Open one of these on the projector. Students say what they think happens to price and quantity before anything moves, lock it in, and then the graph plays out step by step. No accounts, nothing graded or stored.

• Crowding Out: Government Deficit Borrowing
• A Rise in National Saving
• US Interest Rates Rise: The Dollar Appreciates

Warm-up (10 min)

• Project the China figure: after China joined the WTO, U.S. imports from China rose from $102 billion to $399 billion in a decade, and by 2010 the typical family saved about $850 a year. Ask: if some factories closed, why do economists still call this a net gain?
• Think-pair-share for 3 minutes, then cold-call two pairs and hold the tension between winners and losers on the board without resolving it yet.
• Tell students the answer traces back to a 200-year-old idea they will calculate today: comparative advantage.

Direct instruction (45 min)

• Separate absolute advantage (making a good with fewer resources) from comparative advantage (making it at lower opportunity cost). State the rule: comparative advantage, not absolute advantage, determines who specializes.
• Work a two-country output table live. Convert to opportunity cost per one unit, build a small table, and identify who gives up less. Show that a country can hold absolute advantage in both goods yet comparative advantage in only one.
• Establish the terms of trade: any exchange rate between the two opportunity costs leaves both countries better off. Show what happens to the split if the terms sit exactly at one country's own cost.
• Move to world prices: when the world price is below the autarky price the country imports, and when it is above the autarky price the country exports. Walk the surplus changes for each case and note that total surplus rises.
• Build the tariff on the board using the worked example (domestic price $60, quantity 50, world price $40, then a $10 tariff). Get the new price of $50, domestic production of 40, consumption of 60, imports of 20, and revenue of $200.
• Name the two deadweight loss triangles: production-side (domestic firms making the good above world cost) and consumption-side (buyers priced out). Contrast the tariff revenue rectangle as a transfer, not a loss.

Guided practice (45 min)

• Project /sandbox/international-trade. Drag the world-price line below the domestic price and cold-call: does the country import or export, and which surplus grows?
• Drag the world price above the domestic price and cold-call the reverse case. Have students state out loud who gains and who loses in each direction.
• Return to an import scenario and move the tariff slider up. Before the graph settles, have students predict all four effects, then check them against the graph one at a time.
• Send a volunteer to the board to shade the two deadweight loss triangles and the tariff revenue rectangle on a projected still of the graph. Cold-call the class to confirm which region is a transfer and which is destroyed surplus.
• Switch to the quota framing: tell students the same import cut now comes from a quantity limit, and ask who pockets the markup. Confirm quota rents go to license holders, not the government.
• Close with the worked-example numbers: set world price 40, domestic price 60, tariff 10, and have the class verify imports fall to 20 and revenue is 200.

Independent practice (45 min)

• Have students work the 8 questions shown on /practice/international-trade and circulate to catch anyone comparing absolute productivity instead of opportunity cost.
• For the tariff-revenue computation and the tariff-versus-quota distinction, send students to the full bank on /practice-test.

Exit ticket

• On a card: Country A gives up 2 units of wheat per unit of cloth, and Country B gives up 3. Who exports cloth, and why?
• In one sentence, name the two deadweight loss triangles a tariff creates and state why tariff revenue is not one of them.

Homework

• Work through the full international-trade bank on /practice-test (choose the international trade module).
• Read the 'AP Exam Topics' section of /macro/international-trade and write two sentences on why comparative advantage still favors free trade even when specific industries lose jobs.

Differentiation

• Support: give a pre-formatted opportunity-cost table so students focus on the division, not the setup, and a labeled tariff diagram to annotate.
• Support: provide a matching card linking each tariff effect (price, production, consumption, imports) to its direction of change.
• Extension: assign the tariff-versus-quota rent-seeking question and have students argue why economists usually prefer tariffs to quotas.
• Extension: have students connect a persistent trade deficit to the capital and financial account using Topic 6.1 and present the mirror relationship.

Misconceptions to head off

• Students use absolute advantage to decide who specializes. Correct it: comparative advantage, the lower opportunity cost, determines trade, even when one country is more productive at both goods.
• Students count tariff revenue as deadweight loss. Correct it: revenue is a transfer from consumers to the government, and the deadweight loss is the two triangles from inefficient domestic production and lost consumption.
• Students think tariffs and quotas differ in their market effect. Correct it: both raise the domestic price, cut imports, and create the same deadweight loss, and they differ only in who captures the markup, the government versus license holders.
• Students believe free trade helps every group. Correct it: total surplus rises, but the losing side (producers when a country imports, consumers when it exports) is real, and the gains simply exceed the losses.