INTERNATIONAL_TRADE_THEORY

INTERNATIONAL_TRADE_THEORY - INTERNATIONAL TRADE THEORY...

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INTERNATIONAL TRADE THEORY WHAT DOES THE UNITED STATES EXPORT AND IMPORT? Exports They were automobiles, computers, aircraft, corn, wheat, soybeans, scientific instruments, coal and plastic materials. Exports are goods produced at home, but sold abroad for which foreigners have to pay using their own currency as opposed to dollar. Imports They were petroleum, automobiles, clothing, iron & steel, office machines, footwear, fish, coffee and diamonds. Imports are goods produced abroad, but sold at home for which we have to pay using our own currency. WHY DO PEOPLE IN DIFFERENT COUNTRIES TRADE WITH ONE ANOTHER? The reasons why we have international trade are the same as why we have any trade, at any level. Individuals trade to make themselves better off. People trade with each other because they both value something the other has more than they value some of their own possessions. Different countries have different terrain, climate, resource, skills and so on. It follows that some countries will be able to produce some goods that other countries cannot produce or can produce only at extremely high costs. Example: Bananas do not grow easily in the U.S. but they flourish in Honduras. Americans could grow bananas if they used hot houses, but it is cheaper for Americans to buy bananas from Hondurans than to produce bananas themselves. HOW DO COUNTRIES KNOW TO TRADE? To explain how countries know what to trade, we need to discuss the concepts of Absolute Advantage and Comparative Advantage. Absolute Advantage A country has an absolute advantage in the production of a good if using the same amount of resources as another country, it can produce more of a particular good. To put it differently, a country has an absolute advantage in the production of a good if, with fewer resources, it can produce the same amount of a good as another country. U.S. Japan Food Clothing Food Clothing
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A 90 0 60 0 B 60 10 40 20 C 30 20 20 40 D 0 30 0 60 a) No Specialization - No Trade Case Suppose that the U.S is producing and consuming the two goods in the combination represented by point B on its production possibilities frontier, and Japan is producing and consuming the 2 goods in the combination represented by point C on its PPF. The U.S is producing and consuming 60 units of food and 10 units of clothing, Japan is producing and consuming 20 units of food and 40 units of clothing, we refer to this as the no specialization no trade case. b) Specialization – Trade Case Suppose the 2 countries decide to specialize and trade. The U.S specializes in the production of food, producing 90 units, and Japan specializes in the production of clothing, producing 60 units. In short, the U.S. moves to point (A) on its PPF and Japan moves to point D on its PPF. After they have specialized in production, the 2 countries must settle on the terms of
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This note was uploaded on 01/28/2011 for the course ECON 1 taught by Professor Sm during the Spring '10 term at Laney College.

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INTERNATIONAL_TRADE_THEORY - INTERNATIONAL TRADE THEORY...

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