Lecture 17 - ECO100 - Introduction to Economics Lecture 17:...

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ECO 100Y Introduction to Economics ecture 17: Lecture 17: International Trade © Gustavo Indart Slide 1
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Why Does Trade between Two Countries Take Place? ± Both partners gain from trading ± Trade increases the quantity of commodities available for consumption ± Overall production of commodities increases © Gustavo Indart Slide 2
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ains from Trade Gains from Trade ± Two main sources of gains from trade: ¾ Difference in climate and resource endowment ¾ Reduction in cost of production through pg economies of scale ± We will examine two models that take technology as the bases for trade b l Ad dl ¾ Absolute Advantage model ¾ Comparative Advantage model © Gustavo Indart Slide 3
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implifying Assumptions Simplifying Assumptions ± Only 2 countries ± Only 2 goods ± Labour is the only factor of production ± Constant returns to scale © Gustavo Indart Slide 4
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odel of Absolute Advantage Model of Absolute Advantage ± A country can produce a commodity utilizing less labour than the other country ± Absolute advantage implies more efficiency oth countries can gain by specializing in the ± Both countries can gain by specializing in the production of the commodity in which they have an absolute advantage © Gustavo Indart Slide 5
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xample: Absolute Advantage Example: Absolute Advantage Output of One Man/Year Canada Mexico Wheat 61 Cloth 45 i T f T d Domestic Terms of Trade: • Canada: 6W = 4C Æ 1W = (2/3)C i = 5C • Mexico: 1W = 5C International Terms of Trade: > 1W > (2/3)C © Gustavo Indart Slide 6 5C > 1W > (2/3)C
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xample ontinued) Example (continued) ± Canada should specialize in the production of wheat and Mexico should specialize in the production of cloth ± Suppose that the international terms of trade are pp given by 1 W = 1 C ¾ 5 C > 1 W > (2/3) C ± Suppose that Canada transfers one unit of labour from the cloth industry to the wheat industry ± Suppose that Mexico transfers one unit of labour from the wheat industry to the cloth industry © Gustavo Indart Slide 7
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Canada: Changes in Production and Consumption ransfer of 1 unit Transfer of 1 unit of labour from the cloth to the wheat Change in Consumption heat loth industry Wheat Cloth Change through + 6 Production 6 4 Change through rade 6 + 6 Trade Net change 0 + 2 © Gustavo Indart Slide 8
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Mexico: Changes in Production and Consumption ransfer of 1 unit Transfer of 1 unit of labour from the wheat to the cloth Change in Consumption heat loth industry Wheat Cloth Change through + 5 Production 1 5 Change through rade + 5 5 Trade Net change + 4 0 © Gustavo Indart Slide 9
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Total Change in Production and Consumption Wheat Cloth Canada + 6 4 Mexico 1+ 5 Total + 5 + 1 © Gustavo Indart Slide 10
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bsolute Advantage Model Absolute Advantage Model ± Gains from trade depends on international terms of trade odel doesn’t explain how terms of trade are ± Model doesn t explain how terms of trade are determined ± Both countries gain from specializing in production of commodity in which they have an absolute advantage ±
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This note was uploaded on 08/10/2010 for the course ECONOMICS ECO100Y taught by Professor Furlong during the Summer '09 term at University of Toronto- Toronto.

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Lecture 17 - ECO100 - Introduction to Economics Lecture 17:...

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