ECON 2 Lecture Notes - Lecture 18: Real Interest Rate, Comparative Advantage, Autarky

104 views5 pages

Verified Note

whitemarten979

8 Mar 2019

School

Department

Course

Professor

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

ECON 2 verified notes

18/19View all

ECON 2 Lecture Notes - Lecture 17: Lorenz Curve, Current Population Survey (Us), Opportunity Cost

ECON 2 Lecture Notes - Lecture 18: Real Interest Rate, Comparative Advantage, Autarky

ECON 2 Lecture Notes - Lecture 19: Real Interest Rate, Microsoft Powerpoint, Purchasing Power Parity

ECON 2 Lecture 18: Trade and Exchange Rates

The Terms of Trade

● Benefits of international trade come from comparative advantages and specialization

○ Comparative Advantage: one party can produce a product at a lower opportunity

cost than the other party

○ Increased returns of scale allow for greater specialization and reduced prices for

goods

● Comparative Advantage Example: Suppose the US and Malaysia can produce goods as

shown on this chart per day

Lecture 18 PowerPoint, Slide 4

● Malaysia has a comparative advantage in producing cups, since it has a lower

opportunity cost for producing them (1/3 software compared to 2/3 software for the US)

● In order to get a fair trade, Malaysia would trade a cup for at least 1/3 software

○ The US would trade 1 software for at least 3/2 cups

● The US and Malaysia can produce goods as shown by this graph

Lecture 18 PowerPoint, Slide 6

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in

● Suppose the world market price for 1 cup was 1/2 software. If Malaysia only produced

cups, they could trade whichever cups they didn't need for software and end up with

more goods than if they didn't trade anything.

Lecture 18 PowerPoint, Slide 11

Microeconomics of Tariffs

● Tariffs: taxes on imported goods

● Here is what the supply and demand curve looks like in a closed economy (no

exports/imports)

○ CS: Consumer Surplus; how much value the consumers gain

○ PS: Producer Surplus; how much value the producers profit

● Here is what the supply and demand curve looks like in a open economy

(exports/imports)

○ Pw: The world market's price

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Econ 2 lecture 18: trade and exchange rates. Benefits of international trade come from comparative advantages and specialization. Comparative advantage: one party can produce a product at a lower opportunity cost than the other party. Increased returns of scale allow for greater specialization and reduced prices for goods. Comparative advantage example: suppose the us and malaysia can produce goods as shown on this chart per day. Malaysia has a comparative advantage in producing cups, since it has a lower opportunity cost for producing them (1/3 software compared to 2/3 software for the us) In order to get a fair trade, malaysia would trade a cup for at least 1/3 software. The us would trade 1 software for at least 3/2 cups. The us and malaysia can produce goods as shown by this graph. Suppose the world market price for 1 cup was 1/2 software.

Related Questions

The law of comparative advantage states that:

a. each country should specialize in producing the good with the lowest opportunity cost.

b. a country that is able to produce something using fewer resources than other countries would gain from specialization and trade.

c. international trade barriers slow the introduction of new goods and better technologies.

d. countries can gain from trade if production is subject to economies of scale.

e. countries must agree on how much of one good exchanges for another.

turquoiseferret638

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

Suppose that Greece and Switzerland both produce beer and olives. Greece's opportunity cost of producing a crate of olives is 4 barrels of beer while Switzerland's opportunity cost of producing a crate of olives is 10 barrels of beer. By comparing the opportunity cost of producing olives in the two countries, you can tell that.... has a comparative advantage in the production of olives and has a comparative advantage in the production of beer. Suppose that Greece and Switzerland consider trading olives and beer with each other. Greece can gain from specialization and trade as long as it receives more than of beer for each crate of olives it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than..... of olives for each barrel of beer it exports to .... Based on your answer to the last question, which of the following prices of trade (that is, price of olives in terms of beer) would allow both Switzerland and Greece to gain from trade? Check all that apply.

ECON 2 Lecture Notes - Lecture 18: Real Interest Rate, Comparative Advantage, Autarky

ECON 2 Lecture Notes - Lecture 17: Lorenz Curve, Current Population Survey (Us), Opportunity Cost

ECON 2 Lecture Notes - Lecture 18: Real Interest Rate, Comparative Advantage, Autarky

ECON 2 Lecture Notes - Lecture 19: Real Interest Rate, Microsoft Powerpoint, Purchasing Power Parity

Document Summary

Get access

Related Documents

ECON 2 Lecture Notes - Lecture 2: Absolute Advantage, Comparative Advantage, Opportunity Cost

ECON 2 Lecture Notes - Lecture 2: Comparative Advantage, Protectionism, Opportunity Cost

ECON-2110 Lecture Notes - Lecture 2: The Takeaway, Comparative Advantage, Fruit Salad

Related Questions