E333_REVIEW_EXAM1_CH12467quotas

E333_REVIEW_EXAM1_CH12467quotas - AN INTRODUCTION TO...

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AN INTRODUCTION TO INTERNATIONAL TRADE Chapter 1
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GDP, GNP, and PPP Gross Domestic Product (GDP): The value of goods and services produced within a country in a given year. Gross National Product (GNP): The value of goods and services produced by domestic factors of production in a given year. GNP per capita: GNP / population Purchasing Power Parity Exchange Rate (PPP) 2
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Index of Openness Exports (X): Goods and services sold to other countries. Index of openness: (X/GNP) x 100. Example 1: Slovak Republic GNP = 34,992 million, X = 27,660 million Index of openness = Example 2: Japan GNP = 4,751,604 million, X = 565,490 million Index of openness = 3
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TOOLS OF ANALYSIS: AUTARKY EQUILIBRIUM Chapter 2
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Basic Model General Equilibrium All markets in equilibrium simultaneously Can observe all market sectors reactions to international trade ALL markets : huge model Simplifying assumptions 5
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Assumptions Assumption 1 - Rational behavior : No economic agent takes an action that will intentionally make him/her worse off Assumption 2 - Two countries, Two goods: C (Chemicals) and T (Textiles) Two factors of production: Capital (K) and Labor (L): Assumption 13 on p.87 Assumption 3 - Only relative prices matter (No money Illusion) 6
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The Price Line Price Line : the set of combinations of two goods we can afford given our income and prices of the two goods 7
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The Price Line 8 Chemicals Textiles Suppose P C =4, P T =1, and total wealth is 100. What are the intercepts? What is the slope?
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Intercepts and Slope End points (intercepts) of the price line tells us how many units of good C (or T) we can afford if we spend all our income on good C (or T). WARNING : An intercept is NOT the price of the relevant good, but it is the maximum amount that could be bought given the price of the good and income. Slope of the price line tells us how many units of T we have to give up to buy one more C. 9
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The Price Line 10 Chemicals Textiles 100 25 P C =4, P T =1, and total wealth = 100
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The Price Line - Income 11 Chemicals Textiles 100 25 P C =4, P T =1, total wealth = 50 50 12.5
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The Price Line – Relative Prices 12 Chemicals Textiles 100 25 Suppose P C =2, P T =1, total wealth = 100 50
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Production Possibilities Frontier (PPF) Assumption 4 (p. 33): Factor endowments are fixed. Technologies are constant. Production Possibilities Frontier (PPF): All combinations of C and T the economy can produce, given its resources and technology. 13
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Illustrating the PPF Find the intercepts: Vertical intercept: if all resources are used to produce Textiles Horizontal intercept: if all resources are used to produce Chemicals 14
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PPF 15 C C
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General PPF In general, two factors will be together used in the production of both goods. Opportunity cost will rise in a more smooth
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E333_REVIEW_EXAM1_CH12467quotas - AN INTRODUCTION TO...

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