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ECN 104 (442)


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Ryerson University
ECN 104
Tsogbadral Galaabaatar

ECN104 LECTURE NOTES September 14, 2012 Interdependence – Everyday you rely on many people from around the world, most of whom you’ve never met, to provide you with the goods and services you enjoy  One of the Ten Principles from Chapter 1: Trade can make everyone better off  We now learn why people – and nations – choose to be interdependent, and how they can gain from trade. Example  Two countries: Canada and Japan  Two goods: Computers and wheat  One resource: labour, measured in hours  We will look at how much of both goods each country produces and consumes  If the country chooses to be self – sufficient  If it trades with the other country Production Possibilities in Canada  Canada has 50,000 hours of labour available for production, per month  Producing one computer requires 100 hours of labour  Producing one ton of wheat requires 10 hours of labour Basic International Trade Terms Exports  Goods produced domestically and sold abroad to export means to sell domestically produced goods abroad. Imports  Goods produced abroad and sold domestically to import means to purchase goods produced in other countries. Where do these gains come from? Absolute advantage  The ability to produce a good using fewer inputs than another producer  Canada has an absolute advantage in wheat: producing a ton of wheat uses 10 labour hours in Canada vs. the 25 hours of required labour in Japan  If each country has an absolute advantage in one good and specializes in that good, then both countries can gain from trade.  Which country has an absolute advantage in computers?  Producing one computer requires  125 Labour hours in Japan  100 Labour hours in Canada  Canada has an absolute advantage in both goods Question: So why does Japan specialize in computers? Why do both countries gain from trade? Two Measures of the Cost of a Good  Two countries can gain from trade when each specializes in the good it produces at lowest cost  Absolute advantage measures the cost of a good in terms of the inputs required to produce it  Recall: Another measure of cost is opportunity cost  In our example, the opportunity cost of a computer is the amount of
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