Econ 503 Week 1 Notes
Econ 503 Week 1 Notes ECON 503 001
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ECON 503 001
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This 3 page Class Notes was uploaded by Tulsi on Saturday August 27, 2016. The Class Notes belongs to ECON 503 001 at University of South Carolina taught by William Hauk in Fall 2016. Since its upload, it has received 28 views. For similar materials see International Trade Economics in Economics at University of South Carolina.
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Date Created: 08/27/16
ECON 503 Week 1 Thursday, August 18, 21:47 PM 8/18/16 Comparative Advantage Specialization according to opportunity cost Imports Good or service produced in a foreign country and sold in "this" country Exports Good or service produced in this country and sold in a foreign country Trade Balance = Value of Exports - Value of Imports Trade Deficit: Trade Balance <0 Trade Surplus: Trade Balance >0 Bilateral Trade Balance = Value of Exports to One Country - Value of Imports from that Country Trade to GDP ratio = First "Golden Age" of International Trade: 1880s - 1913 -Steamships and Railroads -Telegraphs -Gold Standard -British Empire -Colonial Empires Second "Golden Age" of International Trade: 1948-present? -planes -telephones -internet -container shipping -GATT --> WTO -US Hegemony 8/23/2016 Foreign Direct Investment (FDI) is not the same as Foreign Portfolio Investment FDI: a firm in one country owning and operating a firm in another country "a global movement of capital" Horizontal FDI: takes place between relatively wealthy countries, done for market access reasons Vertical FDI: typical goes from rich to poor countries as part of an integrated global supply chain Comparative advantage exists when a country has a lower opportunity cost of production than other countries Absolute advantage is just a lower absolute cost of production Example: Daily Outputs Wine Cloth Eddie 4 1 Percy 2 2 Consumption without trade: 1/2 day for wine, 1/2 day for cloth Eddie: 2 bottles wine, 1/2 yard cloth Percy: 1 bottle wine, 1 yard cloth Eddie has absolute advantage in wine, Percy has absolute advantage in cloth Specialize and trade: Eddie makes wine, Percy makes cloth. Each will give 1/2 production to the other Eddie: 2 bottles wine, 1 yard cloth Percy: 2 bottles wine, 1 yard cloth Change the situation: Daily Outputs Wine Cloth Eddie 8 4 Percy 4 4 Eddie has absolute advantage in wine Opportunity costs of production: Eddie gives up 1/2 yard of cloth to make 1 bottle of wine Percy gives up 1 yard cloth to make 1 bottle wine -Eddie has the lower opportunity cost of producing wine Eddie gives up 2 bottles of wine to make 1 yard of cloth Percy gives up 1 bottle of wine to make 1 yard of cloth -Percy has the lower opportunity cost of producing cloth Comparative Advantage: Eddie has CA in making wine, Percy has CA in making cloth Consumption without trade: 1/2 day for wine, 1/2 day for cloth Eddie: 4 bottles wine, 2 yards cloth Percy: 2 bottles wine, 2 yards cloth Specialize to trade 3 bottles of wine for 2 yards cloth Eddie: 5 bottles wine, 2 yards cloth Percy: 3 bottles wine, 2 yards cloth 8/25/16 Ricardian Model of Trade -differences in production costs across countries are due to "technology" -one factor of production is labor -2 goods: wine and cloth -labor is mobile across sectors and not mobile across countries -labor is mobile across sectors and not mobile across countries -2 countries: home and foreign HOME country: has the comparative advantage in WINE One worker produces: 4 bottles wine or 2 yards cloth 25 workers Q c Profit function for Firm: MPL =c2 MPL =w4 π = P xQ - w xL Q = F(L) π = F(L) - x L 50 Autarky equilibrium P xF'(L) = w F'(L) = marginal product of labor Indifference curve Slope = P x MPL = w PPF: production possibilities frontier 100 Q w (Relative price of wine) (will decrease with trade) Autarky equilibrium: -workers are mobile across sectors w/P c MPL =creal wage returns on cloth -wages are equalized across sectors w/P = MPL = real wage returns on wine w w Nominal wage: w w = Pcx MPL c P w xMPL w FOREIGN country: has the comparative advantage in CLOTH Autarky equilibrium: One worker produces: 1 bottle wine or 1 yard cloth w* = Pc* xPL *c P *wMPx * w 100 workers Qc* MPL c 1 w*/P *= MPL *= 1 100 MPL w 1 c c w*/P w= MPL *w 1 Autarky equilibrium Indifference curve Slope = PPF: production possibilities frontier 100 Q * w Week 1 Page 3
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