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Lecture 4

ECON 202 Lecture Notes - Lecture 4: Unintended Consequences, Opportunity Cost, Comparative Advantage

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ECON 202

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Lecture 4
Thursday, January 26, 2017
8:01 AM
Chapter 9: The United States in the International Economy
Imports: goods and services bought domestically but produced in other countries
Exports: goods and services produced domestically but sold in other countries
Traditionally, countries imposed high tariffs on imports, believing that such measures made their own
firms and consumers better off
But that meant their exports were similarly taxed
Tariff: a tax imposed by a government on imports
Both imports and exports have steadily rose as a fraction of U.S. gross domestic product (GDP)
More imports than exports
Because of our debt, we need to increase exports, which in turn requires us to up American productivity
China is the leading exporter in the World (9.3%) and behind is US (9.2%)
The export and import as a percentage of GDP is less important to the US and China.
If the bars are higher, that means that they are more specialized (Belgium, The Netherlands..)
The larger the economy, the more people want to trade with you, which increases bargaining power
The terms of trade is the ratio at which a country can trade its exports for imports from other countries
No country would accept terms of trade worse than its opportunity cost
Why don’t we see complete specialization?
In the real world, products are not generally produced by only one nation. Reasons include:
Some goods cannot physically be traded - real estate, buildings, airports, etc.
Services cannot be traded internationally (medical services, haircuts, legal services, etc.)
Production of many goods involves increasing opportunity costs (so small amounts of production
are likely to take place in several countries)
Some products are traded at an international price
Tastes for products may differ across countries
Cars, for example: (have you heard of Peaugot or Renault? Who owned a Fiat five years ago?)
Where does comparative advantage come from?
Climate and natural resources - some nations are better - suited to particular types of production;
particularly important for agricultural goods
central America = fruit and veggies
Middle East, north africa = oil extraction
Brazil = brazil nuts, acai
Southern Africa = diamonds
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