Chapter19

Chapter19 - Chapter 19 The good Market in an Open Economy...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 19 The good Market in an Open Economy Trade: Goods we buy from other countries are called imports. Goods we sell to other countries are called exports. If imports > exports , we have trade deficit. If imports < exports we have trade surplus. Goods We Trade Imports Exports Manufactured Goods 60% 50% Industrial Materials 20% 17% Agricultural Products 3% 7% Services 17% 26% Trading Partners Imports Exports Canada 18% 21% Japan 14% 10% European Union 32% 36% Latin America 22% 28%
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 19 The good Market in an Open Economy Trends in Trade: Net Export = Export – Import 1960 .5% 5% 4.5% 2001 -4% 11% 15% Increase in imports has been due to oil price increases and purchase of machinery. Trade and Transfer of Assets: If NX < 0, we are borrowing from foreigners or selling some of our assets to them. If NX > 0, we are lending to foreigners or buying some of their assets. PPF and Trade: Production possibilities frontier (PPF) shows the maximum amount of goods and services that an economy can produce by using all of its available economic resources efficiently. Given a two-good PPF, the slope of the PPF shows the opportunity cost one good in terms of the other good.
Background image of page 2
Chapter 19 The good Market in an Open Economy Take two countries, USA and Japan and two goods, food and fun. Assume that a certain amount of economic resources can produce food or fun in USA and Japan as given by the following table ( assume that the quality and productivity of resources are the same in both countries ). Country Food Fun USA 10 5 Japan 5 10
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The good Market in an Open Economy Comparative Advantage and Trade: Fun is cheaper in Japan than in USA, food is cheaper in USA than Japan. Japan has comparative advantage in fun and USA has comparative advantage in food. A country has comparative advantage in producing a good if it can produce the good at a lower opportunity cost than the other country. Gains from the Trade: If Japan makes fun and trades it with the USA and if USA makes food and trades it with Japan, both countries will benefit from the trade. Terms of Trade: The quantity of food that USA must pay Japan for a unit of fun is USA’s term of trade with Japan. Since countries trade in many goods, terms of trades are calculated as an index number that averages the terms of trades over all items traded. Terms of trade are decided by the international forces of supply and
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/15/2009 for the course BUAD 350 taught by Professor Safarzadeh during the Summer '07 term at USC.

Page1 / 22

Chapter19 - Chapter 19 The good Market in an Open Economy...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online