Topic08 - Introduction 8. International trade and trade...

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1 8. International trade and trade policy Introduction ± Understanding the economic issues of international trade ² The benefits of trade ² The costs of trade ² The economic impact of trade restrictions Comparative advantage as a basis for trade ± The principle of comparative advantage tells us that we can all enjoy more goods and services when each country produces according to its comparative advantage, and then trades with other countries. Production and consumption possibilities and the benefits of trade ± Closed economy ² An economy that does not trade with the rest of the world. ± Open economy ² An economy that trades with the rest of the world. The production possibilities curve for a two-worker economy ± Example ² A two-goods economy (Brazil) -- computers and coffee. ² Two workers who work 50 weeks/year. ³ Carlos Can produce 100 kg of coffee/week or 1 computer. ³ Maria Can produce 100 kg of coffee/week or 2 computers. The production possibilities curve for a two-worker economy ± Example ² Slope of PPC (Maria) ² Slope of PPC (Carlos) computers -100 kg coffee/wk Maria's OC 50#s of coffee/computer 2 computers/wk == computers -100 kg coffee/wk Carlos' OC 100 #s of coffee/computer 1 computers/wk
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2 The production possibilities curve for a two-worker economy ± Sketch the two-worker PPF ± Overhead Production possibilities curve for a many-worker economy Computers (number/year) Coffee (kg/year) B C A D Observations The OC of producing an additional unit = the slope of the line that touches the point OC will increase as output of on good increases Production and consumption possibilities and the benefits of trade ± A country’s PPC shows the quantities of different goods that its economy can produce. Consumption possibilities with and without international trade ± Consumption possibilities ² The combinations of goods and services that a country’s citizens might feasibly consume. ± In a closed economy ² Society’s production possibilities = consumption possibilities. ² If a country is self-sufficient, it is called autarky. ± In an open economy ² The society’s consumption possibilities are typically greater than its production possibilities. Brazil’s consumption possibilities with trade Computers (number/year) 13 000 100 B 150 10 000 C A G F 5 000 162.5 Consumption possibilities with trade Slope = - 80 kg coffee/computer Production possibilities Slope = - 50 kg coffee/computer Production possibilities Slope = - 100 kg coffee/computer
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Topic08 - Introduction 8. International trade and trade...

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