ch14notes - International Trade An alternative production...

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Unformatted text preview: International Trade An alternative production technology Enhanced specialization opportunities Gross trade flows have increased over time Decreased transportation costs Trade agreements have lowered tariffs Trade is not always balanced From 1950-1975, the U.S. mostly ran trade surpluses Since 1975, the U.S. has consistently run trade deficits In the past several years, these deficits have gotten much larger The planet earth is a closed economy When some countries have deficits, others must have surpluses Trade Across Time We may trade to smooth consumption over time Trade across time requires borrowing and lending When output is low, we borrow for consumption When output is high we repay our past borrowing Y G I C NX Y G I C NX G I C Y NX NX G I C Y < + + + + <--- = + + + = As a nation, suppose that Y G I C + + We must borrow the difference Next period, we repay ) )( 1 ( Y G I C R- + + + Our uses of goods must satisfy: ) 1 ( ) 1 ( ) ( ) )( 1 ( R NX NX R G I C Y G I C Y Y G I C R Y G I C f f f f f f f f f + =- +--- =----- + + +- = + + In present-value terms, net exports must be zero On average, countries must have balanced trade International borrowing may also make for efficient investment U.S. borrowed to build railroads in the 1800s Comparative Advantage: An Example Consider a hypothetical North South example The North is more productive in all goods; Absolute advantage The North will still want to trade with the South Produced goods are apples and computers Both countries prefer to spend half of income on each good Autarky: No trade Each worker has one unit of labor w = = Wage Income Equal consumption shares: 2 Computers of n Consumptio Computers of Price...
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ch14notes - International Trade An alternative production...

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