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Economics- trade theory

by: Hewan Ft

Economics- trade theory ECON 270

Marketplace > James Madison University > Economics > ECON 270 > Economics trade theory
Hewan Ft

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About this Document

With graphs and detailed explanations on trade theory.
International economics
Bob Horn
Class Notes
Economics, trade
25 ?




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This 8 page Class Notes was uploaded by Hewan Ft on Tuesday September 6, 2016. The Class Notes belongs to ECON 270 at James Madison University taught by Bob Horn in Fall 2016. Since its upload, it has received 3 views. For similar materials see International economics in Economics at James Madison University.


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Date Created: 09/06/16
Econ 270­ week 2­ chapter 3 GDP­ Gross domestic product c­ consumption (usually the biggest) + I­Investment (when business add to their businesses, example an expansion to a building aka  additions to capital stock) +  G­ Government spending + (Ex – Im)­ this is also celled net exports which has now been predominantly negative. Example­ if income is 10,000/month – 2000 tax we pay= disposable income  $8000  With the 8000 we have two options 1­ spend it or 2­ save it (saving it can be in bonds, stocks,  or even under the bed) Trade index – index of openness Ex­Im/ GDP This states how much we trade­ AKA  what the proportion of trade makes up our GDP Why would a country have a trade index of over 100% ex Belgium­ which imports their cocoa beans for their well know chocolates and imports diamonds , they produce and process the items and export it at large.  Countries that are production points have a large trade index Trade <­> comparative advantage MJ­ 90 Bball  30­ Baseball Bob ­ 30 Bball 5 Baseball  MJ has the comparative advantage is Baseball because he is 6x better than bob And bob has the comparative advantage in basketball because MJ is only 3x better than him  rather than 6.  BUT MJ HAS THE ABSOLUTE ADVANTAGE IN BOTH GAMES Ex 2 France produces 30l wine and 10l beer Germany produces 10l of wine and 5l of beer Germany has the comparative advantage in beer because it is only 5 L AWAY  where as they  are 20l away from their wine production level. Therefore france will make the wine. Wine (y) beer(x) Rise over run So if we had one day, what are our combinations  if we want to trade of and divide the day to  make both beer and wine. Change in y/ change in x= 30/10= 3 A point inside the curve = not efficient use of products A point outside the curve is not possible according to given technology and possibility Example 2 Wine beer Change in wine = 10 and change in beer is 5 = 2 So if we pick to make 8 wine, the change is the difference between orginal possible wine  production (10) and how much we want to make (8) = 10­8= 2 (so 2 is the change in wine)  2/x=2 so x = 1 If there is a straight PPC line = IT’S CALLED CONSTANT OPPORTUNITY COST Which means our portions of how much wine we give up for beer is constant. But with a curve it  is not constant. Autarky= when a country does not trade its goods So under autarky in france, the opportunity cost of producing 1 beer is 3 wine And to produce 1 bottle of wine we would give up ⅓ of the beer. Therefore under autarky, germany’s opportunity cost for 1 beer = 2 wine And to produce 1 bottle of wine, they give up ½ a beer. And if they opened their borders france would trade their wine for Germany's beer and vise  versa so they are both giving up less. How much will they trade for? If germany offered 1 beer for 5 wines= france would say no If france offered 1:1= germany would say no But if france offered 2 wine for 1 beer A­ germany would not be better off or worse off B­ france would benefit from trade But if  If germany could give up 1 beer and gain 2.5 bottles of beer they would benefit. If france could give up 2.5 bottles of wine and still get 1 beer they would still benefit Therefor the range in which both would benefit is going to be between each country's individual  costs of productions  So france would = 3 And france would = 2 So anywhere between 2 and 3 9.8.16 US  produces 2 cars or 20 avocados Mexico produces 1 car or 15 avocados 1­ which country has absolute advantage? US  in both 2­ Which country has the comparative advantage  US in cars and mexico in avacados 3­ sketch the production possibilities curve Mexico:­  Avacado Cars Rise over run 15/1= 15 for mexico  20/2 = 10 for US And to pick a different point in the production possibility curve it has to be the change from point  a to point b for both rise and run  So if we pick 10 avocados  It would be 15­10 = 5 5/x= 10 Find x to find what the change in cars is to find where it lies. note* Through trade a country can go outside its personal production possibility curve since it is  benefiting from trade and is better of than in a state of autarky When we are asked what happens if we move from point a to point b Make sure to know that with the formula you are using the change and not the point on the  curve.  Suppose Germany trades 50,000 with terms of trade being 2.5 to 1 If it trades all 50,000 they would gain 50,000x 2.5 = 125,0000 wine If it trades on its 20,000 beers it would gain 20,000x 2.5=  50,000 wine But if germany:­  consumes  50,000 wine Imports = 50,000 wine It produces 50,000 beer  And consumes 30,000 beer Exports = 20,000 Therefore imports / exports 50,000/20,000= 2.5 aka terms of trade Wine(y) beer (x) Q. Find out how much beer france would make if they traded with germany or if they made it on  their own. So france =  wine 30 & 10 beer with a workforce of 10,000 So 300,000 wine  and 100,000 beers Ppc = 3 If  the trade terms with germany is  2.5 wine for 1 beer Point a and b are points in which france can attain in a state of autarky whereas C is only  possible through trade.


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