Lecture notes week 12

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University of Toronto Scarborough
Economics for Management Studies
Gordon Cleveland

Week 12 ECMA04 Last week of classes (Monday, Wednesday and Thursday) What format? 40 MC and 2 short answer Help?: Review class on Thursday (regular time available on video) Prof available for help? Thursday 1 2 pm & Monday December 7 1 4pm TAs will do office hours this week This week: International Trade Exports goods and services sold to other countries Imports goods and services purchased from other countries Barriers to trade: Tariff a tax on imported product Quota a limit imposed on the total value or quantity of a good that can be imported each year Other possible barriers to trade: N Preferential government purchasing arrangements N Product inspection and labeling requirements Does trade matter to Canada? About 40% of the goods and services we produce each year are exported About 35- 40% of the value of all goods we consume each year are imported, which is up from 15% in 1961 Bigger percentage than Germany, France, Mexico, China, U.S. Japan In absolute terms, Canada is one of the top ten trading countries in the world. More than 80% with U.S. about $490 billion of exports and about $440 billion of imports What do we export? N motor vehicles and parts, industrial machinery, aircraft, telecommunications equipment; chemicals, plastics, fertilizers; wood pulp, timber, crude petroleum, natural gas, electricity, aluminum What do we import? N machinery and equipment, motor vehicles and parts, crude oil, chemicals, electricity, durable consumer goods Which is better exports or imports? IMPORTS Which helps Canada more? BOTH HELP Does trade make countries better off, or does it make some countries worse off? Do small, inefficient countries suffer from trade (because their industries are less well developed)? Or do they gain from trade (because labour is cheap)? Is trade fair with China, Japan, Mexico, Sri Lanka, and India? Economic theory says trade is beneficial international trade, but also trade inside a country. Same principles apply. If you are an accountant, but you are also great at renovations, should you renovate your own house? Probably not (not if you have to take time off from your accounting job to do the renovations). Even though you are better at renovations than any contractor you could hire, you still should hire someone else to do the work. Why? You could earn more in your accounting job, then the value earned from renovating your home. The Theory of Comparative Advantage David Ricardo Early 1800s. London stockbroker. Analyzed trade between Portugal and England. Considered wine and cloth as the 2 goods. At that time, England was a big manufacturing power; Portugal was underdeveloped, with very low wages. Is it possible for both Portugal and England to gain from trade with each other? Definitions: Absolute Advantage a country has the absolute advantage in producing a commodity if it uses fewer resources to produce that commodity Comparative Advantage a country has the comparative advantage in the producing a commodity if it can produce that commodity at lower opportunity cost. Autarchy situation of self-sufficiency; countries do not trade with each other. Example: Canada and Mexico Wheat and soybeans Only productive resource = labour Canada has 15 units of labour. This labour can be used to produce 30 units of wheat or 30 units of soybeans (or some combination). Production functions: S = 2L W = 2L Where S = number of units of soybeans, W = number of units of wheat, L = number of units of labour www.notesolution.com
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