Chapter 20

Chapter 20 - Chapter 20 STUDENT STUMBLING BLOCK The...

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Chapter 20 STUDENT STUMBLING BLOCK The principle of comparative advantage is not an easy concept to grasp. Where absolute advantage is involved, the principle is understandable, but it is tougher to grasp a situation such as that in the text example where the U.S. has an absolute advantage in both wheat and coffee production. Work through this example carefully with students. A short, soft-cover book, “The Choice” by Russell Roberts illustrates the principle of comparative advantage in story form and does an excellent job. If you assign a supplementary reading, this is recommended. Another idea is to demonstrate comparative advantage at the personal level. A lawyer may be the best gardener and house painter in town (has an absolute advantage). Still it is to the lawyer’s comparative advantage to specialize in law and hire gardeners and painters. LECTURE NOTES I. Facts of International Trade: Highlights A. Exports of goods make up about 11% of total U.S. output. B. The U.S. leads the world in the volume of exports and imports with about 1/8 of the total. C. Since 1975 U.S. exports and imports have more than doubled as a percentage of GDP. D. In 2002 the U.S. had a goods and services trade deficit of $435 billion dollars. The U.S. was a net exporter of services ($49 billion). E. The principal exports of the U.S. are computers, chemicals, semiconductors, consumer durables, and aircraft. Its main imports are petroleum, automobiles, computers, and clothing. F. The U.S. exports many of the “same” goods it imports. (Intraindustry trade) G. The bulk of U.S. trade is with other industrialized nations. H. Improved transportation and communication has contributed greatly to international trade since WWII. I. Although the U.S., Japan, and Western Europe dominate world trade, there are emerging nations around the world that collectively generate substantial international trade such as South Korea, Taiwan, Singapore, and China. The North American Free Trade Agreement (NAFTA) has expanded trade among Canada, Mexico, and the U.S. J. International trade and finance link economies. Economic change in one part of the world has repercussions for countries around the globe. K. International trade and finance is often at the center of U.S. economic policy. II. The Economic Basis for Trade A. International trade is a way nations can specialize, increase the productivity of their resources, and realize a larger total output than they otherwise would. B. Two points amplify the rationale for trade. 1. The distribution of economic resources among nations is uneven.
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2. Efficient production of various goods requires different technologies or combinations of resources. 3. Products are differentiated among nations and some people prefer imports. C.
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This note was uploaded on 06/13/2011 for the course ECON 2252 taught by Professor Byrd during the Spring '11 term at Troy.

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Chapter 20 - Chapter 20 STUDENT STUMBLING BLOCK The...

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