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Lecture 20

ECO105Y1 Lecture Notes - Lecture 20: Joseph Stiglitz, Thomas Babington Macaulay, Anti-Globalization Movement


Department
Economics
Course Code
ECO105Y1
Professor
Avi Cohen
Lecture
20

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ECON 105
2015/2016
Lecture 20
4 April 2016
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2GAINS FROM TRADE
Opportunity cost and comparative advantage
are key to understanding why specializing
and trading makes us all better off.
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3The Importance of International Trade:
Exports & Imports as Percentage of GDP, Selected Countries, 2012
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·Canada is a trading nation — 30+ percent of Canadian GDP is from se
lling exports to the
rest of the world
·With voluntary trade, each person (or country)
feels that what they get is of greater value than
what they give up
·Absolute advantage
ability to produce at a lower absolute cost
·Comparative advantage
ability to produce at a lower opportunity cost
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· Opportunity Cost =
·Comparative advantage key to mutually beneficial gains from trade
·Trade makes individuals (or countries) better off when each
·Specializes in products and services with comparative advantage (low
er opportunity cost)
·Trades for other products and services
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6Jill’s Production Possibilities
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7Marie’s Production Possibilities
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8Opportunity Costs for Jill and Marie
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9Mutually Beneficial Gains from Trade:
Jill’s Gains from Trade
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10 Mutually Beneficial Gains from Trade:
Marie’s Gains from Trade
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ECON 105
2015/2016
Lecture 20
4 April 2016
2
11
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·Even if one individual has absolute advantage
in producing everything, differences in
comparative advantage allow mutually beneficial
gains from specializing and trading
·Terms of trade
quantity of exports required to pay for one unit
of imports
·Must be between each trader’s local opportunity costs
·Different terms of trade will split gains differently
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12 PROTECTIONISM AND TRADE
Freer trade creates winners and losers from the
competitive process of creative destruction.
Concentrated losses in import-competing industries create political
pressure for protectionism despite overall gains.
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13 Adam Smith on Trade
“What is prudence in the conduct of every family can scarce be foll
y in that of a great kingdom. If a foreign country can supply us wit
h a commodity cheaper than we ourselves can make it, better buy it
of them with some part of the produce of our own industry, employed
in a way in which we have some advatage.”
Adam Smith, The Wealth of Nations, 1776
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“Free trade, one of the greatest blessings which a government can c
onfer on a people,
is in almost every country unpopular.”
Thomas Macaulay, British MP, 1824
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·Freer trade increases competition,
creating opponents to freer trade
·Connections to new markets bring new competitors
·With creative destruction, gains from specialization, trade, competi
tion, and innovation destroy higher-cost, and less popular products
and businesses
·Gains are increased productivity and higher
living standards
·Losses are structural unemployment —
technological change or international competition make some workers
’ skills obsolete
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