E-201.Study Guide Chapter7. Key Terms and Questions

E-201.Study Guide Chapter7. Key Terms and Questions -...

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111 7 GLOBAL MARKETS IN ACTION Key Concepts ± How Global Markets Work The goods and services we buy from producers in other nations are our imports ; the goods and services we sell to people in other nations are our exports . In 2008 U.S. exports were $1.8 trillion, about 13 percent of total U.S. production, and U.S. imports were 2.5 tril- lion, about 18 percent of total U.S. expenditure. Both goods and services are traded. Comparative advantage is the factor that drives interna- tional trade. National comparative advantage occurs when a nation can perform an activity or produce a good or service at lower opportunity cost than any oth- er nation. Nations reap gains from trade by specializing in the production of the good or service in which they have a comparative advantage and trading with other nations. Figure 7.1 shows the wheat market, a market in which the United States has a comparative advan- tage. The no-trade price in the United States, $4 per bushel, is less than the world price, $6 per bushel. At the world price, the quantity of wheat demanded by U.S. residents is 10 billion bushels per year, the quantity of wheat produced in the United States is 50 billion bushels per year, and the difference, 40 billion bushels per year, is exported. Figure 7.2 shows the market for blouses, a market in which foreign countries have a comparative ad- vantage. The no-trade price in the United States, $60 per blouse, is greater than the world price, $30 per blouse. At the world price, the quantity of blouses demanded by U.S. residents is 25 million per year, the quantity of blouses produced in the United States is 5 million per year, and the differ- ence, 20 million blouses per year, is imported. Chap ter
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112 CHAPTER 7 ± Winners, Losers, and the Net Gain from Trade The gains and losses from trade are measured as the changes in consumer surplus, producer surplus, and total surplus. Figure 7.3 shows the wheat market, a market in which the United States has a comparative advan- tage. With no international trade the price in the United States is $4 per bushel and 30 billion bush- els are produced and consumed. Consumer surplus is equal to area A + area B and producer surplus is equal to area C . With international trade the price is $6 per bushel, the world price. 10 billion bushels are consumed in the United States, 50 billion bush- els are produced in the United States, and the dif- ference, 40 billion bushels, is exported. Consumer surplus shrinks to area A and producer surplus ex- pands to area B + area C + area D . Consumers lose from this trade and producers gain. On net, total surplus in the United States increases by area D . Figure 7.4 shows the market for blouses, a market
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This note was uploaded on 04/11/2010 for the course ECON E-201 taught by Professor Baiyee-mbi during the Spring '10 term at IUPUI.

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E-201.Study Guide Chapter7. Key Terms and Questions -...

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