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International+Trade - International Trade Introduction the...

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International Trade
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2 Introduction Please review “Efficiency of Markets” (posted on the course website) in order to fully understand the concepts introduced in this topic. In particular, focus on the concepts of consumer surplus, producer surplus, total surplus, and dead-weight loss. 0
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3 Introduction A country has a comparative advantage in a good if it produces the good at lower opportunity cost than other countries. Countries can gain from trade if each exports the goods in which it has a comparative advantage. Now we apply the tools of welfare economics to see where these gains come from and who gets them. 0
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4 The World Price and  Comparative Advantage P W = the world price of a good, the price that prevails in world markets P D = domestic price without trade If P D < P W , country has comparative advantage in the good under free trade, country exports the good If P D > P W , country does not have comparative advantage under free trade, country imports the good 0
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5 The Small Economy Assumption A small economy is a price taker in world markets: Its actions have no effect on P W . Not always true – especially for the U.S. – but simplifies the analysis without changing its lessons. When a small economy engages in free trade, P W is the only relevant price: No seller would accept less than P W , since she could sell the good for P W in world markets. No buyer would pay more than P W , since he could buy the good for P W in world markets. 0
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6 A Country That Exports Soybeans Without trade, P D = $4 Q = 500 P W = $6 Under free trade, domestic consumers demand 300 domestic producers supply 750 exports = 450 P Q D S $6 $4 500 300 Soybeans exports 750 0
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7 A Country That Exports Soybeans Without trade, CS = A + B PS = C Total surplus = A + B + C With trade, CS = A PS = B + C + D Total surplus = A + B + C + D P Q D S $6 $4 Soybeans exports A B D C gains from trade 0
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Analysis of trade Analysis of trade 8 Without trade, P D = $3000, Q = 400 In world markets, P W = $1500 Under free trade,
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