Chap_18_-_Trade[1]

Chap_18_-_Trade[1] - Trade The Unites States buys many...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Trade The Unites States buys many goods and services from other countries. These are called imports. At the same time, we also sell many goods and services to other countries. These are called exports . In order to talk about trade, first we have to revisit comparative advantage. Production possibilities and comparative advantage, revisited Especially around Valentines day when it is cold and yucky in the United States, we import a lot of our roses from Colombia where the weather that time of year is close to ideal for rose growing. At the same time, Colombia imports much of its high tech goods, like computers, from the United States. From this we can tell that Colombia has the comparative advantage in producing roses, and the United States has the comparative advantage in producing computers. In other words, Colombia has a lower opportunity cost to produce roses while the United States has the lower opportunity cost to produce computers. Now lets work out the following hypothetical example: If you remember opportunity cost is defined as: opportuntiy cost = what yougiveup what yougain Therefore: Table 1: Opportunity costs in the U.S. and Columbia United States Columbia Opp cost of a box of roses 2000 c / 1000 r = 2 computers / box of roses 1000 c / 2000 r = .5 computers / box of roses Opp cost of a computer 1000 r / 2000 c = .5 box of roses / computer 2000 r / 1000 c = 2 boxes of roses / computer 0 400 800 1200 1600 2000 0 200 400 600 800 1000 Quantity of Computers Quantity of boxes of roses US PPF 0 250 500 750 1000 0 500 1000 1500 2000 Quantity of boxes of Roses Columbia PPF
Background image of page 1

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

View Full Document Right Arrow Icon
So we can see that the US has a lower opportunity cost in producing computers and Columbia has the lower opportunity cost in producing roses. So the U.S. will specialize in producing computers, and Columbia will specialize in producing roses. Now assume that without trade the United States produced 500 boxes of roses and 1000 computers. Since there was no trade then we would also know that the US would consume 500 boxes of roses and 1000 computers. Furthermore, if we assumed that without trade Columbia produced 1000 boxes of roses and 500 computers we would also know that the Columbia would consume 1000 boxes of roses and 500 computers. Now if we assumed that there was trade, that each contry specialized in the production where it had the comparative advantage, and that the US exported 750 computers while Columbia exported 750 boxes of roses, we could use the following table to work out the gains from trade: Table 2: Gains from Trade the US and Columbia Without Trade With Trade Production Consumption Production Export Import Consumption Gains from Trade U.S. Roses 500 500 0 0 750 0-0+750 =750 750-500 =250 Computers 1000 1000 2000 750 0 2000-750+0 =1250 1250–1000 =250 Columbia Roses 1000 1000 2000 750 0 2000-750+0 =1250 1250–1000 =250 Computers 500 500 0 0 750 0-0+750 =750 750-500 =250 Where does comparative advantage come from? There are three main sources of comparative advantage:
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 8

Chap_18_-_Trade[1] - Trade The Unites States buys many...

This preview shows document pages 1 - 3. Sign up to view the full document.

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