lecture 8

lecture 8 - ADVANTAGE(1 THE GEOMETRY OF TRADE 7 North’s...

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1 LECTURE 8 – WHY COUNTRIES TRADE { Outline z Why trade? { Differences in factor endowments { Other reasons z The basics of trade theory { Absolute advantage { Comparative advantage { Gains from trade z A numerical example 1 Reference: Reading 6 from coursepack. CASE A: ABSOLUTE ADVANTAGE 5 Table A: Alternative outputs from one day of labour (100 workers) South North Bread 30 loaves of bread 100 loaves of bread Wine 90 bottles of wine 80 bottles of wine A country has an absolute advantage over another in the production of a good if it can produce that good using smaller quantities of resources than can the other country (Adam Smith) • North has an absolute advantage in bread • South has an absolute advantage in wine
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2 6 Table B: Alternative outputs from one day of labour (100 workers) South North Bread 30 loaves of bread 100 loaves of bread Wine 90 bottles of wine 100 bottles of wine North has an absolute advantage in the production of both goods. Should it still consider trading with South? CASE B: COMPARATIVE
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Unformatted text preview: ADVANTAGE (1) THE GEOMETRY OF TRADE* 7 North’s production possibility frontier (1:1) South’s production possibility frontier (1:3) 3 8 z North , compared to South, is most advantaged in the production of bread z South , compared to North, is least disadvantaged in the production of wine Table B: Alternative outputs from one day of labour (100 workers) South North Bread 30 loaves of bread 100 loaves of bread Wine 90 bottles of wine 100 bottles of wine CASE B: COMPARATIVE ADVANTAGE (2) THE ARITHMETIC OF COMPARATIVE ADVANTAGE* 10 Before trade (autarky) South (1:3) North (1:1) World total Bread Wine Bread Wine Bread Wine Produced 20 30 70 30 90 60 Consumed 20 30 70 30 90 60 After trade South (1:2) North (1:2) World total Bread Wine Bread Wine Bread Wine Produced 0 90 100 0 100 90 Consumed 25 40 75 50 100 90 Gains from trade South North World total Bread Wine Bread Wine Bread Wine Produced -20 +60 +30 -30 +10 +30 Consumed +5 +10 +5 +20 +10 +30...
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lecture 8 - ADVANTAGE(1 THE GEOMETRY OF TRADE 7 North’s...

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