Chapter 9 Outline -International Trade

Chapter 9 Outline -International Trade - International...

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International Trade Chapter 9 Comparative Advantage Each country specializes in the goods that it produces at the lowest opportunity cost (i.e. in the goods in which the country enjoys a comparative advantage. U.S. Exports In 2004, the exports of goods and services from the U.S. accounted for 10% of the gross domestic product (GDP). Four main U.S. Exports: Technology products; Industrial supplies and materials; Consumer goods and entertainment products. Automotive vehicles U.S. Imports U.S. imports of goods and services in 2004 were 14% of GDP. The 4 main U.S. imports are: Manufactured consumer goods; Industrial supplies and materials (oil); Capital goods Automotive vehicles Trading Partners US Exports go to….. Canada Mexico Japan Great Britain Germany China Trading Partners US Imports come from….. Canada China Mexico
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Japan Germany Great Britain Production and Consumption Possibilities A Production Possibilities Frontier shows the combination of goods and services that a country may produce with efficient use of its resources. A Consumption Possibilities Frontier shows the combination of goods and services that a country’s citizens might feasibly consume. Production and Consumption Possibilities Suppose we have two countries, the U.S. and Canada that produce two goods, DVDs and sofas. The production possibilities for each country is bowed out, indicating that as a country specializes more and more in one good, the opportunity cost of producing that good rises. Production and Consumption Opportunities A closed economy is one that does not trade with the rest of the world. This situation is also known as autarky. An open economy is one that trades with other countries. If an economy is closed, it’s production possibilities is also its consumption possibilities. Production and Consumption Possibilities with Prices We have previously looked at trade as a barter situation. We will now look at Canada’s possible trade with the US with prices of goods included in the analysis. Assume that the world price of DVDs is $15 and the price of a sofa is $750. Production and Consumption Opportunities with Prices As a closed economy, Canada produced and consumed 10,000 DVDs and 500 sofas This is called “autarky equilibrium” Now, suppose Canada opens itself to trade at the world prices and continues to produce 10,000 DVDs and 500 sofas Production and Consumption Opportunities with Prices
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