Workshop_7_HW_Problems_and_Answers

Workshop_7_HW_Problems_and_Answers - Workshop 7 HW Problems...

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Workshop 7 HW Problems and Answers 1. How will countries know which domestic industries have a comparative advantage in order to allocate resources towards specialization in producing those goods and services ? Specialization and gains from international trade will arise naturally through relative price changes on the world market. When domestic firms within an industry have a lower opportunity cost of production than firms in other countries, these firms discover that the price they can receive from foreign buyers (importers from other countries) is higher than the price they can receive from domestic consumers. In other words, the domestic price before international trade is lower than the world price. These domestic firms increase output, demand more labor, capital, and raw materials, and resources flow toward these industries. When domestic firms within an industry have a higher opportunity cost of production than firms in other countries, domestic consumers discover that the price they must pay to foreign sellers for a good than the price they must pay domestic producers. Domestic consumers switch their purchases to foreign imports. The domestic firms producing this good decrease output, decrease their use of labor, capital, and raw materials, and resources flow away from these firms. Each country’s economy naturally becomes specialized in producing output in those industries for which the country enjoys a comparative advantage. However, for each country to gain, each country must allow consumers and producers to have free access to foreign markets. 2.
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This note was uploaded on 09/13/2011 for the course ECON 206 taught by Professor Parkin during the Spring '11 term at Buena Vista.

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Workshop_7_HW_Problems_and_Answers - Workshop 7 HW Problems...

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