Principles of Economics- Mankiw (5th) 176

Principles of Economics- Mankiw (5th) 176 - 182 PA R T T H...

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182 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE As we saw in Chapter 3, trade among nations is ultimately based on compar- ative advantage. That is, trade is beneficial because it allows each nation to spe- cialize in doing what it does best. By comparing the world price and the domestic price before trade, we can determine whether Isoland is better or worse at pro- ducing steel than the rest of the world. QUICK QUIZ: The country Autarka does not allow international trade. In Autarka, you can buy a wool suit for 3 ounces of gold. Meanwhile, in neighboring countries, you can buy the same suit for 2 ounces of gold. If Autarka were to allow free trade, would it import or export suits? THE WINNERS AND LOSERS FROM TRADE To analyze the welfare effects of free trade, the Isolandian economists begin with the assumption that Isoland is a small economy compared to the rest of the world so that its actions have negligible effect on world markets. The small-economy as-
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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