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Lecture 46

ECON 102 Lecture Notes - Lecture 46: Comparative Advantage


Department
Economics
Course Code
ECON 102
Professor
Robert Gateman
Lecture
46

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Econ 102 Lecture 46
3. Terms of Trade: TOT
1. The terms of trade determine how the gains from trade are shared - how will
the gains in world per capita GDP (standard of living) be shared among the
trading nations?
2. Terms of Trade
a. Terms of Trade = international relative price (of export)
b. Terms of Trade = how many imports can be purchased per unit of
export (how many imports to buy one export)
c. Terms of Trade = price of exports/price of imports, in international
markets
Terms of Trade = Px/Pm (value, not
price)
i. From 3 to 4 mangoes per beaver → favourable
ii. From ⅓ to 1 beaver per mango → UNfavourable
3. Improvement in the TOT increase consumption possibilities
Px rises
Pm constant
More imports for one
export
Terms of Trade
“RISE”
*Favourable
Pm rises
Px constant
Less imports for one
export
Terms of Trade
“FALL”
*UNfavourable
Export = Beaver = Wheat
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