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Lecture

Lecture notes week 12


Department
Economics for Management Studies
Course Code
MGEA02H3
Professor
Gordon Cleveland

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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
TA’s 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:
x Preferential government purchasing arrangements
x 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?
x 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?
x 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 1800’s. 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 = 2LS W = 2LW
Where S = number of units of soybeans, W = number of units of wheat, L = number of units of labour
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To form PPF for Canada:
LS = ½S LW = ½W
So PPF is: ½S + ½W = 15
More conveniently, S = 30 - W
Canada’s PPF or Canada’s CPF (Consumption Possibilities Frontier) before trade
Mexico has 40 units of labour. This labour can be used to produce 10 units of wheat or 20 units of soybeans (or some combination).
Production functions:
S = ½LS W = ¼LW
where S = number of units of soybeans, W = number of units of wheat, L = number of units of labour
To form PPF for Mexico:
LS = 2S LW = 4W
So PPF is: 2S + 4W = 40
More conveniently, S = 20 - 2W
Mexico’s PPF or Mexico’s CPF before trade
QUESTIONS::
Who has the absolute advantage in what?
Who has the comparative advantage in what?
Consider absolute advantage:
Absolute Advantage – A country has the absolute advantage in producing a commodity if it uses fewer resources per unit of the good to
produce that commodity
For Canada:
x 1 unit wheat requires ½ unit labour
x 1 unit soybeans requires ½ unit labour
For Mexico:
x 1 unit wheat requires 4 units labour
x 1 unit soybeans requires 2 units labour
Who has the absolute advantage in what? Canada has the absolute advantage in both
Who has the comparative advantage in what?
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