ECO230Y1 Lecture Notes - Lecture 2: Factor Endowment, Invisible Hand, Money Supply

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30 Apr 2016
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As the cost of transportation is decreasing over time (death of distance), distance becomes less important for trade: gravity model has been very successful to explain the level of trade empirically, yet has limited use, because: It does not explain the trade structure, in terms of produced and imported/exported goods. It does not explain the relation between the trade structure and factor endowments and prices. It does not measure the benefits of trade for the trade partners. National wealth: country"s holdings of bullion (specie) Economic activities are viewed as zero-sum game: exporter wins, and importer loses. Positive trade balance means inflow of precious metal to the exporting country from importing country. Increase in national wealth guarantees the financing for stronger military capabilities. Strong state power is critical to economic success. State should regulate activities to ensure favourable (positive) trade balance. Commodities are priced by relative labou0=r content.

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