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by: Julia Metz V

InternationalTrade ECON243

Marketplace > Georgetown University > Economcs > ECON243 > InternationalTrade
Julia Metz V

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This 3 page Class Notes was uploaded by Julia Metz V on Monday October 12, 2015. The Class Notes belongs to ECON243 at Georgetown University taught by CarolRogers in Fall. Since its upload, it has received 23 views. For similar materials see /class/221914/econ243-georgetown-university in Economcs at Georgetown University.


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Date Created: 10/12/15
iTrade Notes ChaEter 1 Trade in the Global Economy Vocabul o o o O 0000 The Bas 1 My Service exports Merchandise goods Foreign direct investment the flow of capital across borders when a firm owns a company in another country Trade balance the difference between a country s total value of exports and its total value of im orts Trade surplus when a country exports more than they import Trade de cit when a country imports more than they export Bilateral trade balance the difference between exports and imports between two countries Barriers to trade all the factors that in uence the amount of foods and services shipped across international borders ics of World Trade We assume that countries have balanced trade with exports equal to imports The value ofimports and exports relative to GDP is another way to report trade A large portion ofinternational trade is between industrial countries trade within Europe and between Europe and the US accounts for about oneithird ofworld trade Larger countries tend to have smaller shares of trade relative to GDP because so much of their trade occurs internall The majority ofworld flows of foreign direct investment occur between industrial countries v Chapter 2 Trade and Technology the Ricardian Model 0 Vocabulary 0 Technology differences in each country s ability to manufacture products 0 Resources labor capital land 0 Outsourcing producing the various parts of a good in different countries and then assembling it in a final location 0 Ricardian model explains how the level of a country s technology affects the wages paid to labor such that countries with better technology have higher wages 0 Factors ofproduction a country s collective resources 0 Foreign direct investment where a country owns a company or factory in another country 0 Absolute advantage when a country has the best technology for producing a certain good 0 Comparative advantage when a country produces a good best compared with how well it produces other goods 0 Marginal Product of Labor the extra output obtained by using one more unit oflabor 0 Production possibilities frontier PPF O Indifference curve each indifference curve shows the combinations of two goods such as wheat and cloth that aperson or economy can consume and be equally satisfied 0 Utility a given level of satisfaction 0 World price line shows the range of consumption possibilities that a country can achieve by specializing in one good and engaging in international trade it is like a new budget constraint for the country under international trade 0 Export Supply Curve 0 Import Demand Curve 0 Terms of trade the price ofa country s exports divided by the price of its imports 0 Notes 0 The Ricardian model ignores the role ofland and capital and instead focuses solely on labor 0 The PPF in the Ricardian model is a straight line which is unique to the model because Labor is held constant O O O O O O O O O 0 0000000 0 00 There are no diminishing returns in the Ricardian model because it ignores the role oflabor and capital The slope of the PPF is also the opportunity cost of whatever is the denominator in terms of the numerator In the absence of39 trade the 1 39 L quot T 39 frontier acts like abudget constraint for the country and with perfectly competitive markets the economy will produce at the point ofhighest utility subject to the limits imposed by its PPF The highest level of utility in a noitrade environment the equilibrium is where the indifference curve is tangent to the PFF Under perfect competition the opportunity cost of a good should also equal the relative price of that good In competitive labor markets firms hire workers up to the point at which the cost of one more hour of labor the wage equals the value of one more hour ofproduction The value of one more hour of labor equals the amount of goods produced in that hour the marginal product of labor times the price of the good P for the price ofwheat and Pquot for the price of cloth Labor will be hired up to the point at which the wage equals PMPL for wheat and PMPL for cloth The wages must be equal ifwe assume that labor is perfectly to move between the two market A price ration like PPquot always denotes the relative price of the good in the numerator measured in terms ofhow much of the good in the denominator must be given up A country has a comparative advantage in a good when it can produce that good at a lower opportunity cost than another country does Those with the comparative advantage in a good will want to export that good and import the good for which their opportunity cost is higher than that of another country s When a good is imported the price of that good will fall in that country when a good is exported the price of that good in the country will rise Two countries are in an international trade equilibrium when the relative price of wheat is the same in the two countries which means that the relative price of cloth is also the same in both countries If the world price of a good is higher than the opportunity cost of that good in one country and the country opens to international trade then the country will increase its production of that good to sell on the world market The world price line increases a country s PPF Trade is balances when exports equal imports The pattern of trade is determined by comparative advantage The Ricardian model also predicts that there are gains for trade for both countries Wages are determined by absolute advantage not comparative advantage In a competitive market firms will pay workers the value of their marginal product Real wage of cloth is PwPcMPLw and the real wage of wheat is MPLw for Home when it produces and exports wheat Real wage of cloth is MPLcquot and the real wage ofwheat is PcPwMPLc for Foreign when it produces and exports cloth Foreign workers earn less than Home workers because Home has the absolute advantage The only way that a country with poor technology can export at a price others are willing to pay is by having low wages As a country develops technology its wages will rise The Ricardian model predicts that wages will rise as a country engages in international trade The international trade equilibrium is the quantity and relative price at which Home exports equals Foreign imports or where the Home export supply curve intersects the Foreign import demand curve 0 Exports are the difference between production and consumption 0 The at portion of the export supply curve is a special feature of the Ricardian model that occurs because the PPF is a straight line 0 A general feature of these export supply and import demand curves is that they begin at the noitrade relative price for each country and then slope up for export supply or down for import demand 0 Home s export supply ofwheat is the excess of the total Home supply over the quantity demanded by Home consumers whereas Foreign import demand is the excess of total Foreign demand over the quantity supplied by Foreign suppliers 0 An increase in the price ofwheat Home s export or a fall in the price of cloth Home s import would both raise its terms of trade 0 Grant walks on his tipitoes O The earnings of speci c factors change the most from changes in relative prices due to international trade 0 Regardless ofwhich good s price changes the earnings of capital and land show the most extreme changes in their rentals whereas the changes in the wages paid to labor are in the middle 0 In the specificifactors model factors ofproduction that cannot move between industries will gain or lose the most from opening a country to trade the factor of production that is specific to the import industry will lose in real terms as the relative price of the import falls the factor of the production that is specific to the export industry will gain in real terms as the relative price of the export good rises O In the specificifactors model labor can move between the industries and earns the saIne wage in each when the relative price of either good changes then the real wage rises when measured in terms of one good but falls when measured in terms of the other good without knowing how much of each good workers prefer to consume we cannot say whether workers are better off or worse off 0 0 Equations 0 Q produced MPL L o Slope of PPF 7MPLLMPLL o PMPLPMPL O PPMPLMPL meaning that the relative price of wheat on the left and the opportunity cost of wheat on the right must be equal in the noitrade equilibrium


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