chapter_33[1 - 33- 1 INTERNATIONAL TRADE Chapter 33 33- 2...

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Unformatted text preview: 33- 1 INTERNATIONAL TRADE Chapter 33 33- 2 Questions in our mind Do imports of goods made with cheap foreign labour destroy jobs at home? Is globalization making the rich richer and the poor poorer? Should our government subsidize our domestic industries to help them compete internationally? 33- 3 Learning Outcomes Basis of interpersonal, interregional and international trade Gains from trade result from comparative advantage, which arises whenever there are differences in opportunity costs of production. Terms of trade determine how the gains from trade are distributed Free trade tends to maximize world income. Protectionism may make one country better off, but the world as a whole tends to be made worse off by protection. The World Trade Organization polices world trade rules and the commercial policies of member governments. 33- 4 Sources of the gains from Trade Open economy vs. closed economy Free trade vs. autarky The advantages realized from trade are called gains from trade. Interpersonal, interregional and international trade. 33- 5 Interpersonal, interregional and international trade Trade between individuals allow people to specialize in those areas they can do relatively well and to buy from others the goods that they themselves can not easily produce. Ex. A doctor and carpenter. With trade between regions, each regions are forced to specialized in those goods in which they have some natural or acquired advantages. Ex. Plain regions, mountain regions, cold regions. 33- 6 Interpersonal, interregional and international trade International trade is necessary to achieve the gains that international specialization makes possible. Trade allows each individual, regions and nations to specialize and concentrate on producing those goods that is produced relatively efficiently while trading to obtain goods and services that it would produces less efficiently than others. 33- 7 Sources of International Trade Diversity in conditions of production endowed with natural resources, supply of petroleum, large amount of fertile land etc. Deceasing Costs manufacturing units enjoy a economies of scale; they tend to lower average cost of production when the scale of production increases . Differences in Tastes: The countries may find that the conditions are same but still have trade due to taste differences. 33- 8 Gains from Trade Absolute advantage: Adam Smiths powerful illustration of the basis and gains from trade is the principle of absolute advantage. Based on the principle, trade is possible and profitable when both the nation should have absolute advantage in producing any of the trade goods. 33- 9 Absolute Advantage US UK Wheat(bushels/man-hour) 6 1 Cloth (Yards/man-hour) 4 5 With an exchange rate of 6W = 6C, US has absolute advantage in Wheat : Export UK has absolute advantage in Cloth : Export US export W and import C UK export C and import W 33- 10 Gains from Trade...
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This note was uploaded on 10/10/2011 for the course ECON c211 taught by Professor Ranjanpandey during the Spring '11 term at Birla Institute of Technology & Science.

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chapter_33[1 - 33- 1 INTERNATIONAL TRADE Chapter 33 33- 2...

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