Lecture 17 - ECO100 - Gustavo Indart Slide 1 ECO 100Y ECO...

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Unformatted text preview: Gustavo Indart Slide 1 ECO 100Y ECO 100Y Introduction to Introduction to Economics Economics Lecture 17: Lecture 17: International Trade International Trade Gustavo Indart Slide 2 Why Does Trade between Two Why Does Trade between Two Countries Take Place? 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 3 Trade Models Trade Models We will examine two models that take technology as the bases for trade Absolute Advantage model Comparative Advantage model Gustavo Indart Slide 4 Simplifying Assumptions Simplifying Assumptions Only 2 countries Only 2 goods Labour is the only factor of production Constant returns to scale Gustavo Indart Slide 5 Model of Absolute Advantage Model of Absolute Advantage A country can produce a commodity utilizing less labour than any other country Absolute advantage implies more efficiency Both countries can gain by specializing in the production of the commodity in which they have an absolute advantage Gustavo Indart Slide 6 Example: Absolute Advantage Example: Absolute Advantage Output of One Man/Year 5 4 Cloth 1 6 Wheat Mexico Canada Domestic Terms of Trade: Canada: 6W = 4C 1W = (2/3)C Mexico: 1W = 5C International Terms of Trade: 5C > 1W > (2/3)C Gustavo Indart Slide 7 Example Example (continued) (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 given by 1W = 1C 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 8 Canada: Changes in Production and Canada: Changes in Production and Consumption Consumption + 2 Net change + 6 6 Change through Trade 4 + 6 Change through Production Cloth Wheat Change in Consumption Transfer of 1 unit of labour from the cloth to the wheat industry Gustavo Indart Slide 9 Mexico: Changes in Production and Mexico: Changes in Production and Consumption Consumption + 4 Net change 5 + 5 Change through Trade + 5 1 Change through Production Cloth Wheat Change in Consumption Transfer of 1 unit of labour from the wheat to the cloth industry Gustavo Indart...
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This note was uploaded on 01/16/2011 for the course ECO ECO100 taught by Professor Inheart during the Fall '09 term at University of Toronto- Toronto.

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Lecture 17 - ECO100 - Gustavo Indart Slide 1 ECO 100Y ECO...

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