ECON 2023 Lecture Notes - Lecture 22: International Trade, Comparative Advantage
8 Dec 2016
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Document Summary
Largest possible amount of outputs: terms of trade. Exchange ratio at which each nation trades their products. Determine whether each nation can get better deal by specializing & trading: u. s. : 1b= 1v. Must obtain more than 1 ton of vegetable from exporting 1 ton of beef. Prefer rate close to 1b= 2v (few export w. more import: mexico: 1b= 2v. Must get more than 1 ton of beef from exporting 2 ton of vegetable. Prefer rate close to 1b=1v (few export w. more import) Actual exchange ratio= depend on world supply & demand: less demand for vegetable, more demand for beef. Exchange ratio close to 1b= 2v (as u. s. prefers: more demand for vegetable, less demand for beef. Exchange ratio close to 1b= 1v (as mexico prefers) => how gains from international specialization & trade are divided btw 2 nations. Gain from trade: suppose: terms of trade are 1b= 3/2v. = each nation supplants domestic ppc: trading possibilities line.
