ECON 340 Class Notes

ECON 340 Class Notes - ECON 340 International Economics...

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ECON 340 5/19/08 Chapter 2: Comparative Advantage 1: Labor Productivity and Trade Why study international Trade? Everything we wear and do involves products from other countries. What should countries ask? Why should we trade? Who should we trade with? What should we trade? What should the trade terms be? (Economic system – system of production and consumption.) Mercantilism Economic system that is a system of production, consumption, and distribution in which members encouraged exports and discouraged imports. Zero Sum Game Any gain by one party requires a loss by another -This is how mercantilism works Thomas Hobbes “All mankind is in a perpetual and restless desire for power…that stops only in death.” Consequently, giving power to the individual would create a dangerous situation that would start a “war of every an against every man” and makes life “solitary, poor, nasty, brutish, and short.” -Now they started looking at how man related to other men and this is where mercantilism was born. Problems with mercantilism 1. The difference between wealth and money 2. Inflation (Purchasing power decreased – more money, higher prices) When you increase price of domestic market, supplies, etc., you raise the price of your goods, so you won’t be able to have beneficial trade. Autarky (No trade) Economic system with no trade, every nation produces what it needs Perfect Competition Each seller is too small to effect price -Implies that the Price = Marginal Cost -Marginal cost is the change in the total cost due to the production of one additional unit of output. Build Theory (of Free Trade) 1. Questions 2. 2. Assumptions about reality
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3. Model (Graphical) (Ricardian Model) 4. Conclusions Assumptions: -Perfect Competition -No one firm, country, industry has the ability to affect market price -Fixed endowment of resources (fully employed and homogenous) -If I have 100 units of labor, I will have 100 tomorrow, not changing -Firms’ technology within countries don’t vary -No advancement of technology, everyone uses the same -Transportation costs are zero -Can look at the very basic -Factors of production are mobile within countries and completely immobile without -We respect political boundaries -Two countries, single input, produce two goods -Good X and Good Y Production Possibilities Frontier Represents all the alternate combinations of goods X and Y a country can produce Suppose: Country A 1) L A = Number of labor unites in Country A 2) Produces Good X and Good Y 3) a Lx = units of labor to create Good X a LY = units of labor to create Good Y Y A L X Slope of PPF = ChangeY/ChangeX = Opportunity Cost a LY X A L Y /a LX Production Possibilities Frontier Opportunity Cost The number of units of Good Y forgone to produce an additional unit of Good X Marginal Rate of Transformation The rate at which the economy “transforms” good X into good Y – by transferring labor out of the X industry and into the Y industry Indifference Curve
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ECON 340 Class Notes - ECON 340 International Economics...

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