332_TradeTheory

332_TradeTheory - Lecture Outline Trade Theory Gains from...

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1 Economic Geography Trade Theory Slide 1 Lecture Outline Lecture Outline – Trade Theory Trade Theory Gains from Trade and Production Possibilities Frontiers Opportunity Cost (revisited) Comparative Advantage versus Absolute Advantage Gains from Trade in Greater Depth Specific Factors Model – Who gains and who loses from trade? Heckscher-Ohlin Classic Trade Theory Krugman’s New Trade Theory – Comparative Advantage is not the ONLY reason to trade Effects of an Import Tariff or an Import Quota Arguments for Free Trade Arguments for Protectionism Trade Wars and Arms Races GATT as a “Peace” Agreement WTO as a “World Court” for Trading Disputes Trans National Corporations and Trade Theory Economic Geography Trade Theory Slide 2 Gains from Trade Gains from Trade Imagine a world with one crop farmer who raises potatoes and one livestock rancher who raises beef cows. Under which conditions would they gain from trade? 1. The potato farmer can only raise potatoes, but likes to eat beef too. The beef rancher can only raise beef, but likes to eat potatoes too. 2. The potato farmer could raise some beef too, but not very easily. The beef farmer could raise potatoes even more easily than the farmer, but less easily than she can raise beef. 3. The beef rancher has a huge beef ranch that also has great soil for potatoes, so she can raise both beef and potatoes more easily than the potato farmer can.
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Economic Geography Trade Theory Slide 3 Production Possibilities Frontiers Production Possibilities Frontiers Amounts produced from 40 hours of work each week. Top – Farmer’s Production Possibilities Frontier (consume @ A) – 20 hours/lb of meat => 2 lbs meat – 10 hours/lb of potatoes => 4 lbs potatoes Bottom – Rancher’s Production Possibilities Frontier (consume @ B) – 1 hour/lb of meat => 40 lbs meat – 8 hours/lb of potatoes => 5 lbs potatoes Economic Geography Trade Theory Slide 4 Opportunity Costs Opportunity Costs opportunity costs are what else you could have produced with your time (or, more generally, with some resource) Example: Farmer could produce 2 lbs meat or 4 lbs potatoes his opportunity cost for 1 lb of meat is 2 lbs of potatoes his opportunity cost for 1 lb of potatoes is ½ lb of meat Rancher could produce 40 lbs of meat or 5 lbs potatoes her opportunity cost for 1 lb of meat is 1/8 th lb of potatoes her opportunity cost for 1 lb of potatoes is 8 lbs of meat So they could gain from trading at any price for potatoes that is between ½ lb of meat and 8 lbs of meat per lb of potatoes. Because each gets more
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This note was uploaded on 08/28/2009 for the course GEOG 332 taught by Professor Staff during the Spring '08 term at Maryland.

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332_TradeTheory - Lecture Outline Trade Theory Gains from...

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