ECO100Y1 Lecture Notes - Lecture 20: Comparative Advantage, Absolute Advantage, Trade Barrier

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bluegrasshopper710

18 Jan 2018

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Document Summary

If terms of trade increase, country is better off. Intuition: goods that country exports have become more expensive and/or goods that country imports have become less expensive. If t(cid:396)ade (cid:396)atio is 3 (cid:272)loths fo(cid:396) 1 (cid:272)o(cid:396)(cid:374), joh(cid:374)"s (cid:373)a(cid:454)i(cid:373)u(cid:373) possi(cid:271)le (cid:272)o(cid:374)su(cid:373)ptio(cid:374) of (cid:272)o(cid:396)(cid:374) is 5 u(cid:374)its. If trade ratio is 2. 5 cloths for 1 corn: terms of trade improve (for john, joh(cid:374)"s (cid:373)a(cid:454)i(cid:373)u(cid:373) possi(cid:271)le (cid:272)o(cid:374)su(cid:373)ptio(cid:374) of (cid:272)orn is 6 units. Increase in world output, as countries specialize in the production of goods in which they have a comparative advantage. Observation: on average, individuals will be better off, some individuals may be worse off. [weak] arguments against free trade: jobs will be lost. Response: jobs will be lost [import competing industries] and jobs will be gained [export industries: ca(cid:374)(cid:374)ot (cid:272)o(cid:373)pete agai(cid:374)st (cid:862)(cid:272)heap fo(cid:396)eig(cid:374) la(cid:271)ou(cid:396)(cid:863) Response: comparative advantage, not absolute advantage is the key to trade, trade must be two-way. Cannot infer difference in unit labour costs from difference in wage rates.

Related Questions

Consider two neighboring island countries called Felicidad and Contente. They each have 4 million labor hours available per month that they can use to produce jeans, corn, or a combination of both. The following table shows the amount of jeans or corn that can be produced using 1 hour of labor.

Country	Jeans	Corn
Country	(Pairs per hour of labor)	(Bushels per hour of labor)
Felicidad	8	32
Contente	12	24

Initially, suppose Contente uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn, while Felicidad uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce corn. Consequently, Felicidad produces 24 million pairs of jeans and 32 million bushels of corn, and Contente produces 12 million pairs of jeans and 72 million bushels of corn. Assume there are no other countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of jeans and corn it produces.

Felicidad's opportunity cost of producing 1 pair of jeans is______ bushels of corn, and Contente's opportunity cost of producing 1 pair of jeans is______â bushels of corn. Therefore,______ has a comparative advantage in the production of jeans, and______ has a comparative advantage in the production of corn.

Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces jeans will produce______million pairs per month, and the country that produces corn will produce______million bushels per month.

In the following table, enter each country's production decision on the third row of the table (marked "Production").

Suppose the country that produces jeans trades 26 million pairs of jeans to the other country in exchange for 78 million bushels of corn.

In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action," and enter each country's final consumption of each good on the line marked "Consumption."

When the two countries did not specialize, the total production of jeans was 36 million pairs per month, and the total production of corn was 104 million bushels per month. Because of specialization, the total production of jeans has increased by______million pairs per month, and the total production of corn has increased by______million bushels per month.

Because the two countries produce more jeans and more corn under specialization, each country is able to gain from trade.

Calculate the gains from tradeâthat is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").

	Felicidad		Contente
	Jeans	Corn	Jeans	Corn
	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)
Without Trade
Production	24	32	12	72
Consumption	24	32	12	72
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption