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CHAPTER 2 Why Countries Trade CHAPTER OUTLINE I. Introduction II. International Trade Versus Interregional Trade international trade occurs for the same reasons as interregional trade gains from technology and gains from trade III. Trade in an Individual Product trade in cloth (U.S./India) — Figure 2.1 supply and demand the effects on India and the U.S. IV. Trade Based on Absolute Advantage A. Absolute Advantage PASSPORT: Football Games, Rats, and Economic Theory PASSPORT: Mercantilism Table 2.1 B. The Gains from Specialization and Trade with Absolute Advantage gains from trade — Table 2.2 the labor theory of value V. Trade Based on Comparative Advantage A. Comparative Advantage Table 2.3 David Ricardo Babe Ruth B. The Gains from Specialization and Trade with Comparative Advantage PASSPORT: Principal Exports of Selected Countries — Table 2.4 Change in world output — Table 2.5 VI. Trade Based on Opportunity Costs A. Opportunity Costs PASSPORT: Labor Costs as a Source of Comparative Advantage — Table 2.6 B. The Gains from Specialization and Trade with Opportunity Costs Table 2.7 Autarky VII. The Production Possibilities Frontier and Constant Costs A. The Production Possibilities Frontier — Table 2.8 B. Production and Consumption Without Specialization and Trade — Figure 2.2 20
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21 Chapter 2 C. Production and Consumption with Specialization and Trade — Figure 2.3 VIII. The Terms of Trade A. Changes in the Gains from Specialization and Trade Table 2.9 Figure 2.4 B. Demand Conditions and the Terms of Trade C. Distribution of the Gains from Trade PASSPORT: The Commodity Terms of Trade Table 2.10 IX. Trade Under Increasing Opportunity Costs A. Increasing Costs and the Production Possibilities Frontier — Figure 2.6 B. Production and Consumption without Specialization and Trade — Figure 2.7 C. Production and Consumption with Specialization and Trade — Figure 2.8 X. Dynamic Gains from Trade economic growth small country benefits product variety competition policy TEACHING NOTES AND TIPS I. Introduction Notes The title of the chapter sets up the introduction. The purpose of the chapter is to start to explain the world pattern of trade – who imports what and who exports what. Next we briefly outline the subjects covered in the chapter: international vs. interregional trade, trade in an individual product, absolute advantage, comparative advantage, the gains from trade, and the dynamic gains from trade. Teaching Tip You already understand trade. You’ve been doing it all your life. We’re just going to teach you what you “know” in more formal terms. II.
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