Chapter 3-Interdependence and Gains from Trade-Class Notes

Chapter 3-Interdependence and Gains from Trade-Class Notes...

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1 Chapter 3. Interdependence and Gains from Trade 1) Principle of Comparative Advantage 2) Gains from Trade 3) Consumption Possibility Frontier 4) Imports and Exports 5) Limits on the terms of trade Bread Cakes 0 5 10 Slope= A Bread Cakes 0 2 8 Slope= B
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2 Questions: 1. If A produces 4 cakes, what is the maximum number of bread that he can make? Show this as point A on his graph. 2. B used half of his resources for cake and the other half for bread production. Show this as point B on his graph. 3. Assume now that they completely specialize according to PCA. What do they produce in this case? Show this as point S on each graph. 4. After they completely specialize, they trade 1 cake for 3 breads. T c =3Bread/cake. Show this new consumption point as point T on each graph. 5. Show the CPF for A and B in case 4 above. 6. Show imports and exports for each country. 7. Construct a table where you can clearly show the gains from trade.
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Unformatted text preview: 8. Start with new graphs and redo point 4 and 5 above for the case when T c =1 Bread/cake. Explain what happens in this case. 9. Start with new graphs and redo point 4 and 5 above for the case when T c =5 Bread/cake. Explain what happens in this case. Principle of Comparative Advantage Trade benefits both parts because it allows people to specialize in activities in which they have a comparative advantage. Opportunity Cost Cakes Bread A B/C C/B B B/C C/B 3 A B Cake Bread Cake Bread Without Trade: Production & Consumption W Trade: Production Trade Consumption: Gains from Trade Imports= goods produced abroad and consumed domestically. Exports = goods produced domestically and consumed abroad. More details in Chapter 9. International trade makes the country as a whole better off, while it can make same individuals worse off....
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Chapter 3-Interdependence and Gains from Trade-Class Notes...

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