Notes - International Trade o Facts in 2006 US exports were...

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International Trade o Facts: in 2006, US exports were $1.4 trillion US imports were $2.2 trillion A lot wasn’t made in US Trade occurs in all countries But most countries have few trading partners Typically, trade w/ countries that o Share a land border o Share the same body of water o Speak the same language o Market size (GDP) The US’s largest trading partner is Canada 2 nd largest is Japan 3 rd largest is EU Trade with China is less than US trade with France, India, and Brazil combined US trade is a growing phenomenon In 1960 the US has a $780 billion trade deficit 30% of international trade is intra-firm trade (within the firm) ex. John Deere makes tractor parts in Mexico that are sent to the US for assembly But only a few firms actually export – and the firms that do are the most productive and pay the highest wages They use more capital Hire the most educated workers Exporting firms usually only sell a small portion of output abroad There seems to be large fixed costs to export Firms export to few destinations, if at all. o Trade and Comparative Advantage PPF and Opportunity Cost At productive efficiency to produce another bushel of corn the US must sacrifice 3/2 cars The opportunity cost to the US at 1 bushel of corn is 3/2 cars Moving from A and B Mexico must sacrifice 2 cars for 8 bushels of corn The opportunity cost of a bushel of corn is 2/8 = ¼ cars Absolute and Comparative Advantage Absolute advantage: when a country can produce more of a single good than another country Comparative advantage: when a country can produce a good at a lower opportunity cost than another (your less worse than another) – can’t have comparative advantage in both goods The US has absolute advantage over Mexico in the production of corn but Mexico has comparative advantage over the US in corn
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The US has absolute advantage over Mexico in cars o The opportunity cost to US of cars is 2/3 cars o The opportunity cost to Mexico of cars is 4 bushels of corn Countries trade base on comparative advantage o Why? The US must sacrifice 2/3 cars to produce another
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This note was uploaded on 03/23/2008 for the course MC 201 taught by Professor Lynnscott during the Fall '08 term at Michigan State University.

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Notes - International Trade o Facts in 2006 US exports were...

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