19GottIntlTradeShow

19GottIntlTradeShow - International Trade Absolute...

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1 International Trade Absolute Advantage Comparative Advantage Free Trade or Protection Tariffs Quotas Customs Unions and Free Trade Areas “Fair Trade”
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2 Neoclassical Theory of International Trade David Ricardo (early 1800s) Argued against “Corn Laws” (1815: prevented imports of food) Raised food prices: raised rent on land (see ch. 17) Comparative advantage English textiles and Portuguese wine Countries should specialize in goods if “comparative advantage” Argument for “free trade” Still controversial (widely accepted by mainstream economists)
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3 EXHIBIT 1 ILLINOIS PRODUCTION POSSIBILITIES CURVE Opportunity cost ? 1 barrel = 1 bushel Assume : 200 hours Oil: 1 hour Corn: 1 hour
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4 EXHIBIT 2 OKLAHOMA PRODUCTION POSSIBILITIES CURVE What is opportunity cost ? 12 barrels = 1 bushel Assume : 200 hours Oil: 1/3 hour Corn: 4 hours
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5 If no trade: Oklahoma: 12 oil = 1 corn Illinois: 1 oil = 1 corn If interstate trade: Oklahoma oil producers try to sell in Illinois . Why? (1 oil for 1 bushel in Illinois) Illinois corn farmers try to sell in Oklahoma . (1 corn for 12 oil in Oklahoma)
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6 EXH. 3 PRODUCTION OF CORN AND OIL BEFORE AND AFTER FREE TRADE Corn increases by 75 bushels to 200 total. Oil increases by 200 barrels to 600 total. Conclusion: everyone gains! Assume : 200 hours each. Each spends ½ of time on each if no trade.
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7 EXH. 4 IMPORTANCE OF RELATIVE PRICES OF PRODUCTS What price? Between 1 oil for 1 corn (Illinois) 12 oil for 1 corn (Oklahoma) What determines relative price? Bargaining (and political) power of the 2 countries. IF relative price is 3 barrels of oil for one bushel of corn.
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8 EXH. 5 PRODUCTION OF CORN AND OIL IN THE UNITED STATES AND MEXICO, BEFORE AND AFTER FREE TRADE Mexico : 6 oil / hour 1 corn / hour US : 3 oil / hour 1 corn / hour Consider opportunity cost Assume 200 hours each (Note : 1 corn / hour for both. )
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Absolute advantage Country able to produce a good using fewer resources than the country it trades with. Comparative
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This note was uploaded on 07/14/2010 for the course ECON 1 taught by Professor Bergstrom during the Fall '07 term at UCSB.

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19GottIntlTradeShow - International Trade Absolute...

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