Comparative_Advantage__Lesson_4_

Comparative_Advantage__Lesson_4_ - A Simple Trade Model...

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1 Lesson 4 1 Again consider an economy that can produce two goods: bread ( X ) and cheese ( Y ) Again assume that producers can use the same bundle of resources to either produce 5 bread or 1 cheese A Simple Trade Model Lesson 4 2 Suppose that producers can sell their output of bread or cheese on world markets, and consumers can go to the world market to buy their bread or cheese. To start, hypothesize that bread and cheese both sell for the same price in the world market. Lesson 4 3 If both goods sell for the same price, producers maximize profit by producing only bread and selling it in the world market. Each unit of bread sold ( exported ) generates enough revenue to purchase ( import ) a unit of cheese.
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2 Lesson 4 4 Consumption Possibilities 500 X Q Y Q 100 500 Production Possibilities Lesson 4 5 X Q Y Q 100 500 500 A Economy-wide gain from trade Exporting bread in return for imported cheese allows more of both to be consumed T Lesson 4 6 X Q Y Q 100 500 500 A Economy consumes more bread, same amount of cheese as in autarky 1 T
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This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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Comparative_Advantage__Lesson_4_ - A Simple Trade Model...

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