Review_Midterm 1_Ch1-6_New

Review_Midterm 1_Ch1-6_New - 1 REVIEW OF REVIEW OF CHAPTERS...

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Unformatted text preview: 1 REVIEW OF REVIEW OF CHAPTERS 1 THROUGH 6 CHAPTERS 1 THROUGH 6 9 Overview Questions About Overview Questions About International Trade International Trade 1. Why do countries trade? What is the basis for trade, especially the product (commodity) composition? 2. What are the overall gains (or losses) from trade for each country? 3. What are the effects of trade on each country’s economic structure? Production, Consumption? 4. What are the effects of trade on the distribution of income within each country? Winners, Losers? 10 10 Consumer Surplus Consumer Surplus • In the diagram, the consumer surplus of consuming 10 units of apple is given by a 25 a 12 b p 10 q 25 a 12 b p 10 q 11 11 Producer Surplus Producer Surplus • In the diagram, the producer surplus of selling 10 units of apple is a 4 p q a b 10 12 12 12 Q Autarky Supply Demand P Autarky Industry Equilibrium Closed Economy Consumer surplus Producer surplus α β 13 13 Q Domestic Q Total S Canada D Canada Gains from free trade Q Autarky Industry Equilibrium with Free Trade (Small Open Economy) P Autarky P World Imports Production α ` β ` α `` 14 14 Demand for imports International Market (Small Economy) P World Imports Supply Rest of the world Gains from free trade 15 15 Demand for Imports International Market (Large Open Economy) P World Imports Supply Rest of the World Gains Domestic Country Gains Rest of the World 16 16 Key Points Key Points 1. Why do countries trade? What is the basis for trade, especially the product (commodity) composition? • If the world price is lower than the autarky price, the home country becomes better off by importing • If the world price is higher than the autarky price, the home country becomes better off by exporting 17 17 Key Points Key Points 2. What are the overall gains (or losses) from trade for each country? • If the home country imports, producers lose and consumers gain • If the home country exports, producers gain and consumers lose • The gains exceed the losses 18 18 Key Points Key Points 3. What are the effects of trade on each country’s economic structure? Production, Consumption? • Production falls if the country imports, rises if the country exports • Consumption rises if the country imports, falls if the country exports 4. What are the effects of trade on the distribution of income within each country? Winners, Losers? • We deal with that in Chapters 4 & 5 • Also haven’t talked about why why the world price might differ from the country’s autarky price 19 19 Chapter 3 Overview Questions Chapter 3 Overview Questions • What is “ merchantilism merchantilism ”? • What fundamental factors determine trade patterns? • What is absolute advantage?...
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This note was uploaded on 02/15/2011 for the course FBE 462 at USC.

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Review_Midterm 1_Ch1-6_New - 1 REVIEW OF REVIEW OF CHAPTERS...

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