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Lecture_chapter9 - Lecture 12(Chapter 9 Introduction Recall...

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Lecture 12 (Chapter 9)
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APPLICATION: INTERNATIONAL TRADE 2 Introduction Recall from Chapter 3: A country has a comparative advantage in a good if it produces the good at lower opportunity cost than other countries. Countries can gain from trade if each exports the goods in which it has a comparative advantage. Now we apply the tools of welfare economics to see where these gains come from and who gets them.
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APPLICATION: INTERNATIONAL TRADE 3 The Small Economy Assumption A small economy is a price taker in world markets: Its actions have no effect on P W . Not always true – especially for the U.S. – but simplifies the analysis without changing its lessons. When a small economy engages in free trade, P W is the only relevant price: – No seller would accept less than P W , since she could sell the good for P W in world markets. – No buyer would pay more than P W , since he could buy the good for P W in world markets.
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APPLICATION: INTERNATIONAL TRADE 4 A Country That Exports Soybeans Without trade, P D = $4 Q = 500 P W = $6 Under free trade, domestic consumers demand 300 domestic producers supply 750 exports = 450 P Q D S $6 $4 500 300 Soybeans exports 750
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APPLICATION: INTERNATIONAL TRADE 5 A Country That Exports Soybeans Without trade, CS = A + B PS = C Total surplus = A + B + C With trade, CS = A PS = B + C + D Total surplus = A + B + C + D P Q D S $6 $4 Soybeans exports A B D C gains from trade
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A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   1 1         Analysis of trade Analysis of trade 6 Without trade, P D = $3000, Q = 400 In world markets, P W = $1500 Under free trade, how many TVs will the country import or export? Identify CS, PS, and total surplus without trade, and with trade. P Q D S $1500 200 $3000 400 600 Plasma TVs
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A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   1 1         Answers Answers 7 Under free trade, domestic consumers demand 600 domestic producers supply 200 imports = 400 P Q D S $1500 200 $3000 600 Plasma TVs imports
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A C T I V E  L E A R N I N G  
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