International Trade

If you check the labels on the clothes are now wearing you will probably find that some of your clothes were made in another country. A century ago the textiles and clothing industry was a major part of the U.S. economy but that is no longer the case. Faced with foregn competitors that can produce quality goods at low cost many U.S firms have found it increasingly difficult to produce and sell textiles and clothing at a profit. As a result they have laid off their workers and shut down their factories. Today much of the textiles and clothing that Americans consume are imported.

The story of the textiles industry raises important questions for economic policy. How does international trade affect economic well-being? Who gains and who loses from free trade among countries and how do the gains compare to the losses.

Introdiced the study of international trade by applying the principle of comparative advantage. According to this principle all countries can benefit from trading with one another because trade allows each country to specialize in doing what it does best. But the analysis in was incomplete. It did not explain how the international marketplace achieves these gains from trade or how the gains are distributed among various economic participamts.

We now return to the study of international trade and take up these questions. Over the past several chapters we have developed many tools for analyzing how market work: supply demand equilibrium consumer surplus producer surplus and so on. With these tools we can learn more about how international trade affects economic weel-being.

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