ECO100Y1 Lecture 20: lecture 20-4

29 views3 pages

bluegrasshopper710

18 Jan 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

With trade, a country can consume outside its ppf by specializing in the production of goods in which it has a comparative advantage. (cid:862)la(cid:449) of o(cid:374)e p(cid:396)i(cid:272)e(cid:863) Internationally traded goods with low transportation costs must sell at the same price in all countries: this is (cid:862)the (cid:449)o(cid:396)ld p(cid:396)i(cid:272)e(cid:863). Domestic price < world price: opportunity cost [domestic resources] of producing good is low. Domestic price > world price: opportunity cost [domestic resources] of producing good is high. Answer: look at which goods the country is importing and exporting. Domestic price < world price country has a comparative advantage and will export good. Domestic price > world price country does not have a comparative advantage and will import good (remember: in perfect competition, prices reflect costs of production) Simplifying assumptions [trade between nations: ca(cid:374)ada is a s(cid:373)all e(cid:272)o(cid:374)o(cid:373)y (cid:396)elati(cid:448)e to the (cid:449)o(cid:396)ld e(cid:272)o(cid:374)o(cid:373)y, so the (cid:449)o(cid:396)ld p(cid:396)i(cid:272)e is (cid:862)gi(cid:448)e(cid:374)(cid:863, e(cid:395)ui(cid:448)ale(cid:374)tly, dd fo(cid:396) t(cid:396)aded goods is pe(cid:396)fe(cid:272)tly elasti(cid:272) at the (cid:862)(cid:449)o(cid:396)ld p(cid:396)i(cid:272)e(cid:863)

Related Questions

1. An import tariff

a. lowers the domestic price of the exported good below the world price.

b. keeps the domestic price of the exported goods the same as the world price.

c. raises the domestic price of the imported good above the world price

d. lowers the domestic price of the imported good below the world price.

2. Which two accounts are included in the balance of payments:

a. current account and the reserve account.

b. current account and the trade account.

c. current account and the capital account.

d. trade account and the capital account.

3. A producer has a comparative advantage in the production of a good when the producer:

a. has a production cost that is less than sales revenue.

b. has the highest cost of production compared to any other producer.

c. is comparatively more efficient at producing the good than it is at producing anything else.

d. specializes through the use of an assembly line.

4. According to the Fischer effect, if the "real" rate of interest in a country is 4 percent and expected annual inflation is 9 percent, the "nominal" interest rate will be _____.

5 percent

B.	13 percent

9 percent

36 percent

bluetortoise611

Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

skybee160

Q2. (35 points) The following table shows the output of textile and auto one unit of labor can produce in the U.K. and the U.S.:

	Textiles	Autos
United Kingdom	16	4
United States	6	3

A)Which country has an absolute advantage in textiles and which country has an absolute advantage in autos?

B)What is the autarky price ratio of autos relative to textiles in each country?

C)Which country has a comparative advantage in textiles and which country has a comparative advantage in autos?

D)Which product should each country export?

E)Suppose the United States has 300 units of labor available. Construct the production-possibilities frontier (PPF) and identify the optimal autarky equilibrium (using an indifference curve) for the United States.

F)Suppose the international price is set at 1 auto:3 units of textile and the U.S. decides to completely specialize at producing the product in which it has a comparative advantage. How would the above graph change? Use the graph to show the gains from trade and the export and import quantities. For each unit of export good, how much does the U.S. gain (measured in terms of the other good)?

G)Discussion: At what level of international price ratio will all the benefits from trade accrue to the United States?

Your answer:

raspberrymole776

ECO100Y1 Lecture 20: lecture 20-4

Document Summary

Get access

Related textbook solutions

Principles of Economics

Principles of Macroeconomics

Principles of Microeconomics

Related Documents

ECO100Y1 Lecture 21: 21-3

ECO100Y1 Lecture Notes - Textile Industry, Trade Route, Trade Barrier

ECO100Y1 Lecture Notes - Lecture 11: Absolute Advantage, Comparative Advantage, Trade Barrier

Related Questions