Documented Problem Solving: International Trade and Comparative Advantage

Students will:

• understand the concept of comparative advantage;
• recognize the benefits of specialization and international trade;
• describe the impact of trade at the microeconomic level.

This activity is appropriate for the study of International Trade which is a common course topic in Principles of Macroeconomics, Principles of Microeconomics, Foundations of Economics, Economics Survey, and International Trade.

An example as a MC and a T/F question that work well with the documented problem solving approach follows.

Suppose the United States has a comparative advantage in the production of chemicals and Mexico has a comparative advantage in the production of cars. If the two countries specialize and trade according to their comparative advantage, then:
a) U.S. chemical producers will be better off.
b) Mexican car producers will be worse off.
c) U.S. car producers will be better off.
d) Mexican chemical producers will be better off.

Answer: a

If the United States has a comparative advantage in the production of chemicals and Mexico has a comparative advantage in the production of cars, and the two countries specialize and trade, then U.S chemical producers will be worse off.

Answer: False

Students commonly think that rich countries benefit from international trade and that poorer countries do not. In addition, they think that because some workers may be displaced for a period of time, trade must be bad. Finally, they've heard the slogan "Buy American" and thus they think that relying on imported goods makes a country weak.

An example of an appropriate documented problem solving answer follows.

In order to begin solving this problem, I thought about the definition of comparative advantage. It means that a country is able to produce a good or service at a lower opportunity cost than its trading partner. Since the United States has the comparative advantage in the production of chemicals, it should specialize in chemical production and export chemicals to Mexico. Mexico has a comparative advantage in the production of cars. That means that it should specialize in car production and export cars to the United States. Both Mexican car producers and U.S. chemical producers will be better off, as long as the terms of trade are between the respective opportunity costs. And, both countries will be better off as a whole.

But, based on the example we talked about in class, there will be individuals within each country that are worse off as a result of the specialization and trade, at least initially. Mexican chemical producers will be worse off, and U.S. car producers will be worse off, too. Over time, the inputs used to produce cars in the United States and the resources used to produce chemicals in Mexico will likely be employed in the production of other goods and services. This is known as factor mobility.

Angelo, T.A. and Cross, K.P. (1993). Classroom Assessment Techniques: A Handbook for College Teachers. San Francisco: Jossey-Bass.