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The International Economy

International Trade 
Before NAFTA was passed, Congressman David Bonior of Michigan warned: “If the agreement with Mexico receives congressional approval, Michigan’s auto industry will eventually vanish.” But what actually happened was that employment in the automobile industry increased by more than 100,000 jobs over the next six years.

What happens when a given country, in isolation, becomes more prosperous? It tends to buy more because it has more to buy with. And what happens when it buys more? There are more jobs created making the additional goods and services that are now in greater demand.

Make that two countries and the principle remains the same. There is no fixed number of jobs that the two countries must fight over. If they both become more prosperous, they are both likely to create more jobs. The only question is whether international trade tends to make both countries more prosperous.

What it comes down to is the fact that the only reason international trade takes place in the first place is because both parties expect to benefit. If it is not a win/win, then don’t trade.

The Basis for International Trade 
The reasons why countries gain from international trade are usually grouped together by economists under three labels: Absolute Advantage, Comparative Advantage, and Economics of Scale.

Absolute Advantage 
It is much cheaper to grow bananas in the tropics than in places where greenhouses and other artificial means of maintaining warmth would be necessary. In tropical countries, nature provides free the warmth that people have to provide by costly means in cooler climates.

This is just one example of what economists call “absolute advantage”—one country, for any of a number of reasons, can produce some things cheaper than another. These reasons may be due to climate, geography, or the mixture of skills in their respective populations.


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