Comparative_Advantage__Lesson_5_

Comparative_Advantage__Lesson_5_ - A Simple Trade Model,...

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1 Lesson 5 1 A Simple Trade Model, Continued In this lesson, we provide additional examples of how trade expands the consumption possibilities of a country We again show that it is always possible with trade for an economy to consume at least as much of each good as consumes in autarky. If the relative price with trade is different than the relative price with autarky, then it is possible for an economy to consume more of each good compared with its autarkic consumption Lesson 5 2 Example: Autarky Relative Price = 1 X Q Y Q Q Q X Y Q Q Δ Δ = slope Q Q Q Q X Y = Δ Δ 1 = Q Q -slope = Y X P P Lesson 5 3 In the absence of trade, consumption possibilities are limited by production possibilities. The consumption possibilities frontier is identical to the production possibilities frontier. Suppose that with trade 1 Y X P P As a specific example, suppose 3 = Y X P P
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2 Lesson 5 4 All of the following statements are equivalent: With trade, X is three times as expensive as Y With trade,
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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_5_ - A Simple Trade Model,...

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