Chapter_13 - Chapter 13 International Trade and Finance...

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Unformatted text preview: Chapter 13 International Trade and Finance International Trade Countries engage in international trade for two basic reasons: They are different from each other in terms of climate, land, capital, labor, and technology. They try to achieve scale economies in production. Comparative Advantage Produce and export those goods and services for which it is relatively more productive than other countries (has a lower opportunity cost) Import those goods and services for which other countries are relatively more productive than it is (has a higher opportunity cost) Example 40 20 Scotland 5 10 Russia Whisky (Litres) Oil (Barrels) One unit of labour in each country can produce either oil OR whisky. A unit of labour in Russia can produce either 10 barrels of oil per period OR 5 litres of whisky. A unit of labour in Scotland can produce either 20 barrels of oil OR 40 litres of whisky. Russia: if it moved 1 unit of labour from whisky to oil it would sacrifice 5 litres of whisky but gain 10 barrels of oil (OC of oil = 5/10 = ) Moving 1 unit of labour from oil to whisky production would lead to a sacrifice of 10 barrels of oil to gain 5 litres of whisky (OC of whisky is 10/5 = 2) Scotland: if it moved 1 unit of labour from whisky to oil it would sacrifice 40 litres of whisky but gain 20 barrels of oil (OC of oil = 40/20 = 2) Moving 1 unit of labour from oil to whisky production would lead to a sacrifice of 20 barrels of oil to gain 40 litres of whisky (OC of whisky is 20/40 = ) For Scotland the OC of oil is four times higher than that in Russia (2 compared to ) In Russia, oil can be produced cheaper than in Scotland (Russia only sacrifices 1 litre of whisky to produce 2 extra...
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Chapter_13 - Chapter 13 International Trade and Finance...

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