ECON 101 Lecture 7: ECON 101 - Chapter 7 Notes

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University of British Columbia - Okanagan
ECON 101
Noriko Ozawa

Tuesday, November 1, 2016 ECON 101 Chapter 7: Comparative Advantage and the Gains from International Trade 7.1 Canada and the International Economy • Imports: goods and services bought (consumed) domestically but produced in other countries. • Canada spends about 1/3 of its expenditure from other countries. • Exports: goods and services produced domestically but sold (consumed) in other countries. • Canada sells about 1/3 of its output in other countries. • Canadian economy depends on international trade. 7.2 Comparative Advantage in International Trade • Comparative Advantage: the ability of an individual, a firm, or a country to produce a good at a lower opportunity cost than competitors. • Opportunity Cost: the highest valued alternative that must be given up to engage in an activity. • Absolute Advantage: the ability to produce more of a good than competitors when using the same amount of resources. 1 Tuesday, November 1, 2016 7.3 How Countries Gain from International Trade Autarky: a situation in which a country does not trade with other countries. (non- • trade situation) • Terms of Trade: the ratio at which a country can trade its exports for imports from other countries. (exchange rate - how much quantity of one good is exchanged for the other.) 2 Tuesday, November 1, 2016 Why don’t we observe complete specialization? Three Main Reasons: 1. Not all goods and services are traded internationally. 2. Production of most goods involves increasing opportunity costs. • If a country devotes more workers to producing a good, the opportunity cost of producing more of that good will increase, causing the country to stop short of complete specialization. 3. Tastes for products differ. • Most products are differentiated. As a result, countries may each have a comparative advantage in producing different varieties of a particular product. Does anyone lose as a result of trade? • Yes, some firms that produced the import are likely to lose their business to foreign competitors. (Social, political debate) What does comparative advantage come from? Climate and natural resources • • e.g. producing tropical fruits • Relative abundance of labour and capital • highly skilled workers/sophisticated machinery (become very productive) • Technology • the ability to develop new products vs. the ability to improve the processes used to make existing pro
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