Comparative_Advantage - The Equilibrium Pattern of Trade...

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Comparative Advantage The Theory of International Trade
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Why Trade? Make money on exports When cost is less than what foreign buyers will pay Buy imports cheap When import prices are less than domestic prices But what about lost domestic jobs and profits?
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Trade Problem U.S. worker productivity Corn 600 bu Oranges 200 bu Mexican productivity Corn 100 bu Oranges 100 bu
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Comparative Advantage U.S. worker productivity Corn 600 bu Oranges 200 bu Op cost Corn Oranges Mexican productivity Corn 100 bu Oranges 100 bu Op cost Corn Oranges
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Mutual Benefit U.S. opportunity cost = 3 corn/orange Mexico opportunity cost = 1 corn/orange
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Comparative Advantage Analysis Draw the production possibilities Find the opportunity costs Find comparative advantage Export the comparative advantage good Trade at relative prices between the autarkic comparative advantage Show the larger opportunity set
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Combined opportunity set
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Inefficient Allocation
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Unformatted text preview: The Equilibrium Pattern of Trade • How to make money from comparative advantage • Buy goods where there is comparative advantage • Sell them abroad • Use the money to buy the foreign country’s comparative advantage good • Sell them at home • Repeat Sources of Comparative Advantage • Natural endowments – Iowa corn; Kenyan coffee; French wine • Experience (learning by doing) – Iranian carpets • Capital • Human capital • Labor • Technology Michigan’s Comparative Advantage • Water • Engineering • Research universities • Airports – Detroit and Grand Rapids • Agriculture – – But • Population loss; poor government; union culture; stodgy corporations Comparative Advantage U.S. worker productivity Wine 400 cases Software 200 program Chile productivity Wine 400 cases Software 100 program...
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This note was uploaded on 03/19/2008 for the course ECON 201 taught by Professor C.liedholm during the Spring '07 term at Michigan State University.

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Comparative_Advantage - The Equilibrium Pattern of Trade...

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