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Introduction to international Economics Chapter 1 and 2

by: Ashley Notetaker

Introduction to international Economics Chapter 1 and 2 Econ 375

Marketplace > Central Michigan University > Economcs > Econ 375 > Introduction to international Economics Chapter 1 and 2
Ashley Notetaker
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Introduction to International Economics
Christopher Bailey

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Chapter 1 Introduction to comparative advantage Chapter 2 Comparative Advantage
Introduction to International Economics
Christopher Bailey
Class Notes
Economics, International Economics, Econ, comparative advantage




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This page Class Notes was uploaded by Ashley Notetaker on Monday February 15, 2016. The Class Notes belongs to Econ 375 at Central Michigan University taught by Christopher Bailey in Winter 2016. Since its upload, it has received 8 views. For similar materials see Introduction to International Economics in Economcs at Central Michigan University.


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Date Created: 02/15/16
Chapter 1 The Globalization Challenge Does getting cheaper andor better products and services from abroad justify sacrificing domestic jobs Why are some people in some countries very rich and obese while others dismally poor and starving Financial globalization and unrestricted capital flows lead to the more efficient use of capital throughout the world as well as provide opportunities for higher returns and risk diversification for individuals and corporations Globalization is being blamed for world poverty and child labor in poor countries job losses and lower wages in rich countries as well as environmental pollution and climate change throughout the world International Trade and The Nations Standard of Living For developing nations exports provide employment opportunities and earnings to pay for the many products that they cannot produce at home for the advanced technology they need A rough measure of the economic relationship among nations or their interdependence i given by the ratio of their imports and exports of goods and services to their gross domestic product GDP The GDP refers to the total value of all goods and services produced in the nation Imports and exports as a percentage of GDP are much larger for smaller industrial and developing countries than they are for the United States Much more important quantitatively for the nations standard of living are the many products that could be produced domestically but only at a higher cost than abroad The International Flow of Labor and Capital Since the mid1980s the united states has become an increasingly large net borrower from the rest of the world to cover its excess of spending over production The Subject Matter of International Economics International economic deals with economic and financial interdependence among nations It analyzes the flow of goods service payments monies and people between a nation and the rest of the world the policies directed at regulating these flows and their effect on the nations welfare International trade theory analyzes the basis for and the gains from trade It analyzes the relationship between the internal and external sectors of the economy of a nation and how they are interrelated or interdependent with the rest of the world economy under different types of international monetary systems Individual nations treated as single units and with the price of individual commodities International economic relations differ from interregional economic relations International flows of goods services and resources give rise to payments and receipts in foreign currencies which change in value over time Current International Economic Problems and Challenges 1 2 Slow growth and high unemployment in advanced economies after the great recession trade protectionism in advanced countries in a rapidly globalizing world 1 the best policy for the world as a whole is free trade with free trade each nation will specialize in the production of the commodities that it can produce most efficiently and 99 by exporting some of them obtain more of other commodities than it could produce at home Excessive fluctuations and misalignment in exchange rates Structural imbalances in advanced economies and insufficient restructuring in transition economics 1 The united states is simply living beyond its means by borrowing excessively abroad 2 The result is an overvalued dollar huge and unsustainable trade deficit and unstable financial conditions 3 Inadequate growth in these areas slows the growth of the entire world economy and leads to calls for protectionism Deep Poverty in Many Developing Countries Resource Scarcity Environmental Degradation Climate Change and Sustainable Development International Institutions and The World Economy The world trade organization world bank international monetary fund and united nations 1 World Trade Organization WTO the genevabased international organization to which most nations of the world belong with authority over international trade in goods and services 2 World Bank Provides loans to developing countries for development programs with the stated goal of reducing poverty 3 International Monetary Fund IMF oversees that member nations follow a set of agreedupon rues of conduct in international finance and provides borrowing facilities for nations with temporary balance of payments difficulties 4 United Nations UN Whose stated aims are to facilitate cooperation in international law international security economic development social progress and human rights issues Chapter 2 Mercantilists View on Trade Mercantilists maintained that the way for a nation to become rich and powerful was to export more than it imported Today we measure the wealth of a nation by its stock of human manmade and natural resources available for producing goods and services Trade Based on Absolute Advantage Adam Smith For two nations to voluntary trade with each other both nations must gain If one nation gained nothing or lost it would simply refuse to trade Trade between two nations is based on absolute advantage When one nation is more efficient than another in the production of one commodity but is less efficient than the other nation in producing a second commodity then both nations can gain by each specializing in the production of the commodity then both nation for the commodity of its absolute disadvantage The increase in the output of both commodities measures the gains from specialization in production available to be divided or shared between the two nations through trade Free trade would lead to the most efficient use of world resources and would maximize world welfare What is important is that both nations can gain from specialization in production and trade Trade based on Comparative Advantage David Ricardo According to the law of comparative advantage even if one nation is less efficient than the other nation in the production of both commodities there is still a basis for mutually beneficial trade The first nation should specialize in the production of and export the commodity in which its absolute disadvantage is smaller and import the commodity in which its absolute disadvantage is greater Comparative Advantage and Opportunity Costs The labor theory of value which postulates that the value or price of commodity depends exclusively on the amount of labor going into the production of the commodity 1 that either labor is the only factor of production or that labor is used in the same fixed proportion in the production of all commodities and 2 that labor is homogeneous The cost of a commodity is the amount of a second commodity that must be given up to release just enough resources to produce one additional unit of the first commodity Production Possibility Frontier with Constant Costs The production possibility frontier is a curve that shows the alternative combinations of the two commodities that a nation can produce by fully utilizing all of its resources with the best technology available to it Straightline production possibility frontiers reflect constant opportunity costs Points inside or below the production possibility frontier are also possible but are inefficient the sense that the nation either has some idle resources andor is not using the best technology available to it Points above the production frontier cannot be achieved with the resources and technology currently available to the nation Constant opportunity costs arise when 1 resources or factors of production are either perfect substitutes for each other or used in fixed production are either perfect substitutes for each other or used in fixed proportion in the production of both commodities and 2 all units of the same factor are homogeneous or exactly of the same quality Opportunity Costs and Relative Commodity Prices Demand considerations do not enter at all in the determination of relative commodity pnces Basis For and Gains From Trade Under Constant Costs In the absence of trade a nation can only consume the commodities that it produces As a result the nations production possibility frontier also represents it consumption frontier


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