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9-11 lecture notes

9-11 lecture notes - trade • Country a is happy because...

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The amount of y sacrificed to produce one more unit of x is represented by the slope If a has an opp cost of .5y to produce one x and country b has an opp cost of 1y to produce one x then country a has a comparative advantage in x. Also, country b has a comp ad in producing y Therefore, country a should specialize in x and country b should specialize in y No specialization: o Country a uses half its resources on x and y, a will produce 50 x and 25 y o Country b uses half its resources on x and y, b will produce 50 x and 50 y o Total production in the world will be 100 x and 75 y With specialization, total production would be 100 x and 100 y If willing to enter into trade then this will benefit even more, and anywhere between these two ratios then both countries benefit If willing to exchange 100x for 60y this is known as the international terms of
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Unformatted text preview: trade • Country a is happy because it could only get 50y from its resources and is receiving 60y • Country b is also happy because they receive 100x for only 60y instead of 100y • The gain from trade may not be equal because country a gains 10 and country b gains 40 • What determines the terms of trade o The relative strengths of each country The art of negotiation The feelings towards the other products • The only reason not to trade is for a moral or political gain, but any restriction of trade has a negative economic impact • There will be some losers in trade in both countries, but the gain of the gainers is more than the loss of the losers and so therefore on the whole the country benefits...
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