Chap006 - Chapter 06 Gains From Trade in Neoclassical...

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Chapter 06 – Gains From Trade in Neoclassical Theory CHAPTER 6 GAINS FROM TRADE IN NEOCLASSICAL THEORY Learning Objectives: To understand economic equilibrium in a country that has no trade. To grasp the welfare-enhancing impact of opening a country to international trade. To realize that either supply differences or demand differences between countries are sufficient to generate a basis for trade. To appreciate the implications of key assumptions in the neoclassical trade model. I. Outline Introduction - The Effects of Restrictions on U.S. Trade Autarky Equilibrium Introduction of International Trade - The Consumption and Production Gains from Trade - Trade in the Partner Country Minimum Conditions for Trade - Trade between Countries with Identical PPFs - Trade between Countries with Identical Demand Conditions - Conclusions Some Important Assumptions in the Analysis - Costless Factor Mobility - Full Employment of Factors of Production - The Indifference Curve Map Can Show Welfare Changes Summary Appendix: “Actual” versus “Potential” Gains from Trade II. Special Chapter Features In the Real World: Income Distribution Changes with Increased Trade in the United States III. Purpose of Chapter The purpose of this chapter is to build the case, using familiar microeconomic tools, for a country to participate in international trade rather than to remain in autarky. The chapter thus uses more modern or updated analysis, compared to the Classical model, to evaluate the impact of trade. The chapter also attempts to acquaint the student with some of the important underlying assumptions in this neoclassical analysis. 6-1
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Chapter 06 – Gains From Trade in Neoclassical Theory IV. Teaching Tips A. The chapter begins with an analysis of the costs of trade restrictions in terms of lost imports and exports. This provides students with a real-world estimate of the potential gains from free trade as a motivation for the theoretical discussion in this chapter. B. We find it useful to dwell on the production equilibrium material, since students don’t usually seem to have an economic grasp of why the equilibrium production point on the PPF emerges in the standard competitive framework. C. When introducing the effects of international trade it is worthwhile to stress that the “trading line” is in fact the consumption-possibilities frontier (CPF) with trade. This CPF is outside the economy’s CPF in autarky (which is identical to the PPF), except at the point of tangency to the PPF. D. The consumption gain from trade sometimes puzzles students. It can be useful to explain this gain as the natural result of receiving a relatively higher price for the good now sold on the world market, coupled with paying a relatively lower price for the good now bought on the world market.
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This note was uploaded on 11/27/2009 for the course ECON 421 taught by Professor Macphee,c during the Spring '08 term at UNL.

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Chap006 - Chapter 06 Gains From Trade in Neoclassical...

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