Lecture3--ECONOMICGROWTHANDINTERNATIONALTRADE

Lecture3--ECONOMICGROWTHANDINTERNATIONALTRADE - Economic...

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Unformatted text preview: Economic Growth and International Trade How we expand and go beyond our production possibilities Economic Growth is an Increase in Production Possibilities The Sources of Economic Growth Are: x 1. Resource Growth x 2. Advances in Technology x 3. Improvements in Resource Quality x Food per year Economic growth means that the production possibilities curve will shift out 0 Clothing per year Food per year Economic growth means that the production possibilities curve will shift out 0 Clothing per year Economic growth in One Sector increases production possibilities in all sectors Food per year A 0 Q1 Other goods per year Economic growth in One Sector increases production possibilities in all sectors Food per year A 0 Q1 Q2 Other goods per year Economic growth in One Sector increases production possibilities in all sectors Food per year A 0 Q1 Q2 Other goods per year Investment in New Capital, Education, and Technology Is the Major Determinant of Economic Growth. Making Investments for the Future Generally Requires Sacrifice of Current Consumption. The Greater a Nation's Rate of Investment, the Greater Its Rate of Economic Growth Investments Investments I A Current production possibilities curve in Nation A Current production possibilities curve in Nation B I B 0 C Current Consumption 0 C Current Consumption Both nations begin with the same production possibilities. Nation A invests more than Nation B giving up more current consumption. Nation A therefore has a higher savings rate than Nation B. Investment in New Capital, Education, and Technology Is the Major Determinant of Economic Growth. Making Investments for the Future Generally Requires Sacrifice of Current Consumption. The Greater a Nation's Rate of Investment, the Greater Its Rate of Economic Growth Investments Investments Future production possibilities curve in Nation A Future production possibilities curve in Nation B I A Current production possibilities curve in Nation A Current production possibilities curve in Nation B I B 0 C Current Consumption 0 C Current Consumption Nation A ends up with a bigger increase in its future production possibilities compared to Nation B as a result of its higher saving and investment International Trade International trade makes it possible to obtain items at lower opportunity costs than can be achieved through domestic production x Infeasible production possibilities become feasible consumption possibilities through international trade x Without international trade Atlantica is DVD players at point A where it gives up 25,000 tons per year of wheat per year so it can produce 25,000 DVD players 50,000 25,000 A 0 225,000 250,000 Wheat per year (tons) By specializing in wheat production and DVD Players exporting 25,000 tons of wheat to Pacifica per year in exchange for 50,000 imported DVD players Atlantica can get to point T 50,000 IMPORTS 50,000 DVD Players 25,000 A EXPORTS 25,000 TONS T 0 225,000 250,000 Wheat per year (tons) International trade allows us to achieve consumption possibilities beyond our production possibilities ...
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