Oct 29 International Trade

Oct 29 International Trade - International Trade Summary of...

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International Trade Summary of the past lecture A tax on a good o Reduces the welfare of buyers and sellers of the good, o The reduction in consumer and producer surplus usually exceeds the revenues raised by the government The fall in total surplus is called the deadweight loss of the tax Taxes have a deadweight loss because they cause buyers to consume less and sellers to produce less. Context and Purpose Economics is the study of how societies produce and distribute goods in an attempt to satisfy the wants and needs of its members. How do we satisfy our wants and needs in a global economy? o We can be economically self-sufficient o We can specialize and trade with other, leading to economic interdependence. Interdependence and the gains from trade Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity Why is interdependence the norm? o Interdependence occurs because people are better off when they specialize and trade with others What determines the pattern of production and trade? o Patterns of production and trade are based upon differences in opportunity costs. A Parable A simplified economy Two goods: potatoes and meat Two people: a rancher and a farmer What should each produce? Why should they trade? 1. Gains from trade obvious if the farmer can only grow potatoes and the rancher raise cattle 2. Fairly obvious is the farmer can raise cattle as well as grow potatoes, but he is not as good at it 3. Not as clear if either the farmer or the rancher is better at producing both potatoes and meat
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Production opportunities The farmer an the rancher work 8 hours a day Shows the amount of time it takes to produce one ounce of either good. Production before trade Specialization and trade Suppose the rancher suggests the farmer specialize in the production of potatoes and then trade with the rancher for meat The rancher will spend 6 hours a day production meat and 2 hours a day growing potatoes The rancher will trade 5 kilos of meat for 25 kilos of potatoes Productions consumption after trade
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Productions and consumption after trade Comparative Advantage Absolute Advantage Summary o The farmer and the rancher are able to consume more potatoes and meat after the trade o It would have taken more than 8 hours to produce these quantities on their own Absolute advantage o The comparison among producers of a good according to their productivity o The rancher has an absolute advantage in both productions. Opportunity cost and comparative advantage
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Oct 29 International Trade - International Trade Summary of...

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