Chap_09 - Introduction Recall from Chapter 3: 0 A country...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
APPLICATION: INTERNATIONAL TRADE 1 Introduction Recall from Chapter 3: 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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
APPLICATION: INTERNATIONAL TRADE 2 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
Background image of page 2
APPLICATION: INTERNATIONAL TRADE 3 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
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
APPLICATION: INTERNATIONAL TRADE 4 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
Background image of page 4
APPLICATION: INTERNATIONAL TRADE 5 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
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   1 1         Analysis of trade Analysis of trade 6 Without trade, P D = $3000, Q = 400 In world markets, P W = $1500 Under free trade, how many TVs will the country import or export? Identify CS, PS, and total surplus without trade, and with trade. P Q D S $1500 200 $3000 400 600 Plasma TVs 0
Background image of page 6
A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   1 1         Answers Answers 7 Under free trade, domestic consumers demand 600 domestic producers supply 200 imports = 400 P Q D S $1500 200 $3000 600 Plasma TVs imports 0
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   1 1         Answers Answers 8 Without trade, CS = A PS = B + C Total surplus = A + B + C With trade, CS = A + B + D PS = C Total surplus = A + B + C + D P Q D S $1500 $3000 Plasma TVs A B D C gains from trade imports 0
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 29

Chap_09 - Introduction Recall from Chapter 3: 0 A country...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online