ABSTRACT
This chapter begins by discussing why countries trade and outlines the theory of comparative advantage that underlies the reasoning for mainstream economists’ support of unregulated trade. It discusses the limitations of the theory as it applies to the modern world. Subsequently, the chapter takes up issues of protectionism, and tariff and non-tariff barriers that countries use to protect particular industries. Exchange rates change when people shift the amount of foreign goods or investments that they want, and this in turn affects the relative prices of goods and assets. To illustrate the theory of comparative advantage, economists use production possibilities curves and consumption possibilities curves. In addition, the theory of comparative advantage is often wrong when it comes to explaining global trade patterns. The theory of comparative advantage assumes that resources—labor and capital—will flow quickly and easily from the sector without a comparative disadvantage to the sector with the comparative advantage.
