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ECON 101 NOTES: International Economies

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Alexander Gainer

SUPPLY AND DEMAND INTERNATIONAL ECONOMICS - Comparative advantage – if one country can make a product at a lower opportunity cost than another country - The world price of a good prevails in the world market - A country has a comparative advantage if the domestic price is less than the world price - In this chapter we assume the domestic price of a product is the opportunity cost - Under free trade the country will export the good iD P W P - No comparative advantage if P D P W - If there is no comparative advantage than under free trade, the country will import the good - Quota – set quantity on what one can import - Free trade – no taxes on imports THE SMALL ECONOMY ASSUMPTION - Assume that a country is a price taker in the world market because their actions don’t affect the world price - In reality only USA impacts the world price, every other country is a price taker - World price is the only relevant price - No seller would accept less than world price, since he/she could sell the good Wor P in world markets - No buyer would pay more than P sDnce he/she could buy the good for P Wn world markets - The domestic price is set by the domestic supply and the domestic demand EXPORTS - When there is a surplus you export - Q S Q D amount exported Without trade With free trade P CS = A+B CS= A A Supply PS= C PS= B+C+D D New equilibrium B Total Surplus= A+B+C Total Surplus= A+B+C+D C Both are better off with free trade, Demand but consumers get less benefits Q IMPORTS - When there is a shortage you import P With free trade - Q – Q = amount imported Supply D S CS= A+B+D A PS= C Without trade Total Surplus= A+B+C+D CS= A B D New equilibrium PS= B+C C Demand
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