trade lec2 rev - Trade Theories Chapter 2. Key Questions...

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Trade Theories
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Chapter 2. Key Questions About International Trade Why do countries trade? What is the basis for trade, especially the product (commodity) composition? For each country, what are the overall gains (or losses) from trade? What are the effects of trade on each country’s economic structure? (Production, consumption.) What are the effects of trade on the distribution of income within each country? (Winners, losers.)
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Figure 2.1 – Demand and Supply for Motorbikes
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Figure 2.2 – The Market for Motorbikes: Demand and Supply
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Figure 2.3 – The Effects of Trade on Production, Consumption, and Price, Shown with Demand and Supply Curves
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Figure 2.3 – The Effects of Trade on Production, Consumption, and Price, Shown with Demand and Supply Curves (Part 2)
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Figure 2.4 – The Effects of Trade on Well-Being of Producers, Consumers, and the Nation as a Whole
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Figure 2.4 – The Effects of Trade on Well-Being of Producers, Consumers, and the Nation as a Whole (Part 2)
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Chapter 3 Why Everybody Trades: Comparative Advantage
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Adam Smith’s Example Absolute Advantage
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Ricardo’s Theory of Trade Ricardo focused on labor productivity (or resource productivity more generally) for different products in different countries. Comparative advantage A country will export products that it can produce at a low opportunity cost (in terms of other goods that could be produced within the country). A country will import products that it would otherwise produce at a high opportunity cost. Basis for trade: Relative differences in labor (resource) productivity.
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Ricardo’s Example: Comparative Advantage
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Ricardo’s Example: No-Trade Relative Prices
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The Gains from Trade, Shown for Ricardo’s Constant-Cost Case
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Absolute Advantage Does Matter for Wage Rates
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Assumptions used Each country has same amount of resources/inputs; hence technological differences source of trade 2 countries, 2 goods Constant returns to scale of resources moving from one sector to another Resources can move freely from one sector to another (no restrictions) No transportation costs No “media of exchange”, nominal exchange rate Static results; no effects on trade from income redistribution
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Chapter 4 Trade: Factor Availability and Factor Proportions Are Key
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In Chapter 3, constant marginal (opportunity) costs Many industries face rising, rather than constant MC This chapter: Increasing marginal costs; bowed out PPC Introduce indifference curves to illustrate consumer’s tastes Use these tools to show a country with and without trade From this, will show: - basis for trade: (i) differences in demand (ii) differences in technology (Ricardo) (iii) Heckscher-Ohlin; abundance of factors of production - gains from trade -effects on production and consumption
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This note was uploaded on 02/05/2012 for the course ECON 4140 taught by Professor A during the Spring '11 term at York University.

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trade lec2 rev - Trade Theories Chapter 2. Key Questions...

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