Econ_433_s10_lec5

Econ_433_s10_lec5 - Advanced International Trade Lecture 5...

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Advanced International Trade Lecture 5 Prof. Tybout January 26, 2010
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2 Lecture outline Trade theory basics Quick review of example from lecture 3 The specific factors model: an extreme case Production functions Outsourcing: a preliminary look Relevant reading: Feenstra and Taylor, chapter 3. First homework assignment due today. Next assignment to be posted Thursday.
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Specific factors: an extreme case Specific factor : factor that can only be used for the production of a particular good. An extreme case : Economy produce cloth and grain using two types of workers— farmers and weavers. Farmers can only produce grain, weavers can only produce cloth. 3
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Q c Q w w Q c Q Extreme specific factors The production possibility frontier
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5 The economy-wide budget line If prices prevail, economy-wide income is And at this income, consumers can afford any combination of wheat and cloth that satisfies: This equation implies an economy-wide budget line: The budget line passes through the production point. (Why?) C W P P , w c w c c C P P P I C = w w c c Q P Q P I + = w w c c C P C P I + = Extreme specific factors
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c Q w w Q c Q p P P C W = The production possibility frontier and autarky prices Why does autarky equilibrium occur at the price ratio identified above? Extreme specific factors
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Econ_433_s10_lec5 - Advanced International Trade Lecture 5...

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