ch32 - Trading With The World Patterns and Trends in...

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Chapter 32 Trading With The World Patterns and Trends in International Trade Our imports are the goods and services that we buy from people in other countries. Our exports are the goods and services that we sell to people in other countries. The value of exports minus the value of imports is called net exports . When we export more than we import, we lend to foreigners or buy more foreign assets. When we import more than we export, we borrow from foreigners or sell some of our assets to foreigners. The Gains from International Trade The fundamental force that generates international trade is comparative advantage . And the basis of comparative advantage is divergent opportunity costs . In this chapter we will see how divergent opportunity costs bring comparative advantage and gains from trade for countries. Farmland can produce grain and cars. Its production possibilities are shown by the blue PPF curve. Suppose that Farmland produces 15 million tonnes of grain and 8 million cars at point A .
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The opportunity cost of a car is given by the slope of the PPF at point A . That slope is –9. Farmland can produce cars at a cost of 1 car for 9 tonnes of grain. Mobilia can also produce grain and cars. Its production possibilities are shown by the blue curve. Suppose that Mobilia produces 18 million tonnes of grain and 4 million cars at point A' . The opportunity cost of a car is given by the slope of the at point . That slope is –1. Mobilia can produce cars at a cost of 1 car for 1 tonne of grain. A country has a comparative advantage in producing a good if it can do so at a lower opportunity cost than any other country. Grain costs less to produce in Farmland than in Mobilia. Cars cost less to produce in Mobilia than in Farmland. Farmland has a comparative advantage in grain and Mobilia has a comparative advantage in cars. Farmland and Mobilia can gain from trade. With no international trade, 1 car costs 9 tonnes of grain in Farmland. Farmlanders consume (and produce) 8 million cars a year. If the cost of a car decreased, they would consume more cars. With no international trade, 1 tonne of grain costs 1 car in Mobilia. Mobilians consume (and produce) 18 million tonnes of grain a year. If the price of grain decreased, they would consume more grain.
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The figure shows Farmland’s import demand curve for cars. It also shows Mobilia’s export supply curve of cars.
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This note was uploaded on 06/30/2009 for the course ECON 1020 taught by Professor Parkin during the Spring '09 term at UWO.

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ch32 - Trading With The World Patterns and Trends in...

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