Lecture+32 - Announcements MT3 with answers will be posted...

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Announcements MT3 with answers will be posted soon There are still a few unclaimed iClicker numbers. Those numbers are posted on Scholar. Ch 19 HW due on Wednesday (last HW!) Office hours every day this week 2-4pm or by appointment. Practice Qs for taxes and trade will be posted soon. 1 of 29
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Reasons for Comparative Advantage 1.Differences in Resource (Factor) Endowments : Different countries have different endowments of things like minerals, land, capital, labor, climate, etc. that effect the production of goods and therefore comparative advantage. Important differentiation between skilled and unskilled labor: U.S. has a well educated work force and therefore tends to export goods produced with skilled labor and import goods produced with unskilled labor. The U.S. has a lot of coal, but not much oil – export coal, import oil The U.S. climate is good for producing corn, but 2 of 29
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3 of 29 Reasons for Comparative Advantage THE HECKSCHER-OHLIN THEOREM Heckscher-Ohlin theorem A theory that explains the existence of a country’s comparative advantage by its factor endowments: A country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product.
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Reasons for Comparative Advantage 2. Economies of Scale : When economies of scale are present, such that average cost (AC) is decreasing with output, then countries can specialize in goods to lower average costs and be more competitive. This is seen a lot with very capital-intensive goods. Note: Comparative advantage can change over time. The U.S. used to have comparative advantage in producing TVs so the U.S. exported TVs but now East Asia has comparative advantage so we import 4 of 29
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Trade and tastes Comparative advantage alone does not explain all trade. Differing tastes between nations may also explain trade as well as why certain countries produce certain goods. For example, the U.S. imports and packages a lot of coffee while the U.K. imports and packages a lot of tea. Some people in the U.S. like tea too, so we import it from the U.K. and they import coffee. We don’t need a comparative advantage story for trade to 5 of 29
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6 of 29 Trade and Exchange Rates EXCHANGE RATES exchange rate The ratio at which two currencies are traded. The price of one currency in terms of another. When trade is free—unimpeded by government-instituted barriers— patterns of trade and trade flows result from the independent decisions of thousands of importers and exporters and millions of private households and firms. The exchange rate sets the conditions under which these decision are made and under which trade takes place. First, for any pair of countries, there is a range of exchange rates that
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Lecture+32 - Announcements MT3 with answers will be posted...

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