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IBLecture%202H2 - L2H LECTURE 2 INTERNATIONAL TRADE THEORY...

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L2H LECTURE 2 INTERNATIONAL TRADE THEORY I. NATION-ORIENTED TRADE THEORY Mercantilism Comparative Advantage Factor Endowment/Factor Proportion Theory of Trade Patterns Leontief Paradox II. INDUSTRY-ORIENTED TRADE THEORY Product Life-Cycle Theory New Trade Theory Theory of National Competitive Advantage Appendix A: Comparative Advantage and Gains From Trade Appendix B: An Explanation of the Leontief Paradox 1
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Appendix A: Comparative Advantage and Gains from Trade Suppose both India and the U.S. have 300 resources. The resources can be used to produce either cell phones or garments. Assume all the resources are to be fully utilized. (i) Resource requirement Suppose the resource requirement per unit of production of wheat and tea respectively in India and the U.S. is as follows: Table 1 Resource Requirement per Unit Resource Requirements per: India United States Cell phones 15 4 Garment 3 2 (ii) Production possibilities (a) Production possibilities refers to the total amount of one product that can be produced when the entire amount of resources is devoted to its production. Table 2 Production Possibilities India United States Cell phones 300/15=20C 300/4=75C Garment 300/3=100G 300/2=150G (b) Production possibility curve/frontier (iii) Opportunity cost, absolute and comparative advantage: Opportunity costs of producing one unit of a product refer to the amount of the other product that will be sacrificed using the same amount of resources.
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