Week 1 Book Notes
Week 1 Book Notes Econ 340
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This 3 page Class Notes was uploaded by Danielle Lynch on Friday September 11, 2015. The Class Notes belongs to Econ 340 at Michigan State University taught by Steven Matusz in Fall 2015. Since its upload, it has received 123 views. For similar materials see Survey of International Economics in Economcs at Michigan State University.
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Date Created: 09/11/15
Ch 3 Comparative Advantage and the Gains from Trade Introduction The Gains from Trade Gains from trade Making national welfare better Adam Smith and the Attack on Economic Nationalism Mercantilism Economic thought in the 1700 s stressing exports over imports as a way to obtain revenues for building armies and national construction projects Zero Sum Key mistake in mercantilism stating that one nation s gain is another s loss Specialization depends on the size of the market Trade barriers decrease specialization technological progress and wealth creation A Simple Model of Production and Trade Assumptions 2 countries 2 goods 1 input labor firms are price takers no firm has market power technology is constant productivity doesn t increase over time Absolute Productivity Advantage and the Gains from Trade Labor productivity Units of output Hours worked Absolute productivity advantage Produces more of a product per hour worked compared to another country Opportunity cost The value of the best forgone alternative to the activity actually chosen Both countries benefit from trade when the price remains between the opportunity costs for both nations Comparative Advantage in a Single Natural Resource Resource Curse The negative economic effects that sometimes occur when a country has a single valuable resource such as oil Difficult to develop a diverse and educated labor force if one activity is dominant When the price of the dominant commodity uctuates it leads to boom and bust cycles Political problems Comparative Productivity Advantage and the Gains from Trade Production possibilities curve Shows the max of output given inputs Also the opportunity cost Inside the PPF Inefficiency Outside the PPF Infeasible because resources do not permit this Slope ofthe PPC change in xchange in y Relative Prices Relative price The price of one good in terms of another good The quantity of the first good that must be given up to buy the second good 0 If no trade relative price opportunity cost The Price Line of Trade Line Autarky Absence of trade PriceTrade line The rate at which one good trades for another in a two good model the slope of the price line is relative price Trading allows a country to move up the trade line and consume more of a product The Gains from Trade In the absence of trade consumption production Trade line Trade price or the price between the opportunity costs for both countries Domestic Prices and the Trade Price If price gt opportunity cost the higher cost country will switch production to the other good until price lowers and it switches back Vice versa Absolute and Comparative Productivity Advantage Contrasted Absolute productivity advantage Having higher labor productivity Comparative productivity advantage Opportunity costs of producing a good are lower than those of its trading partner One country can have an absolute advantage for both products but not a comparative advantage for both Gains from Trade with No Absolute Advantage Market price may not accurately re ect the economic value of an input or an output There is a wedge between commercial or competitive advantage and comparative advantage Commercial advantage lowers living standards by failing to maximize the value of national output Nations don t compete like domestic companies do nations can benefit in both growing Economic Restructuring Economic restructuring Changes in the economy that may require some industries to grow and others to shrink or disappear In reality workers cannot move industry to industry Trade lowers costs increases innovation diffuses technology Arguments for compensating employee dislocation The nation benefits from trade so there are new resources to make compensation possible ethical obligation to assist people and compensation reduces incentives to oppose trade Trade adjustment assistance Extended unemployment benefits and worker retraining Subsidies limit the ability of lowcost producers to fully exploit their comparative advantage of cotton