Chapter 5 - WHAT YOU WILL LEARN IN THIS CHAPTER chapter 5 > InternationalTrade 1 of 46 WHAT YOU WILL LEARN IN THIS CHAPTER How comparative

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1 of 46 WHAT YOU WILL LEARN IN THIS CHAPTER chapter:   5 >> International Trade
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2 of 46 WHAT YOU WILL LEARN IN THIS CHAPTER How comparative advantage leads to mutually beneficial international trade The sources of international comparative advantage Who gains and who loses from international trade, and why the gains exceed the losses How tariffs and import quotas cause inefficiency and reduce total surplus Why governments often engage in trade protection to shelter domestic industries from imports and how international trade agreements counteract this
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3 of 46 Comparative Advantage and International Trade Goods and services purchased from other countries are imports; goods and services sold to other countries are exports. Globalization is the phenomenon of growing economic linkages among countries. To understand why international trade occurs and why economists believe it is beneficial to the economy, we will first review the concept of comparative advantage. The following graph illustrates the growing importance of international trade…
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4 of 46 The Growing Importance of International Trade (b) Imports and Exports for Different Countries, 2005 Belgium China 90% 80 70 60 50 40 30 20 10 Percent  of GDP 2000 2006 1960 1970 1980 (a)  U.S. Imports and Exports 1960-2006 1990 Year 18% 16 14 12 10 8 6 4 2 Percent  of GDP Imports Exports Mexico France Germany Canada U.S.
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5 of 46 Production Possibilities and Comparative Advantage, Revisited Let’s repeat the definition of comparative advantage from earlier: A country has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for that country than for other countries. The Ricardian model of international trade analyzes international trade under the assumption that opportunity costs are constant. Autarky is a situation in which a country cannot trade with other countries. The following figure shows hypothetical production possibility frontiers for the U.S. and Colombia and we assume that: there are only two goods and the production possibility frontiers are straight lines.
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6 of 46 Comparative Advantage and the Production Possibility Frontier (a) U.S. Production Possibility Frontier (b) Vietnamese Production Possibility Frontier 0 2,000 1,000 Quantity of shrimp (tons) Quantity of  computers 1,000 500 PPF US C US Slope = –2 U.S. production and consumption in autarky 0 1,000 500 Quantity of  computers 2,000 1,000 PPF V C V Vietnamese production and  consumption in autarky Slope = –0.5 Quantity of shrimp (tons)
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7 of 46 The Gains from International Trade The Ricardian model of international trade shows that trade between two countries makes both countries better off than they would be in autarky that is, there are gains from trade.
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This note was uploaded on 10/04/2011 for the course ECON 2006 at Virginia Tech.

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Chapter 5 - WHAT YOU WILL LEARN IN THIS CHAPTER chapter 5 > InternationalTrade 1 of 46 WHAT YOU WILL LEARN IN THIS CHAPTER How comparative

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