Economics 1021A/B Lecture Notes - Deadweight Loss, Economic Surplus, Import Quota

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13 Nov 2012

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ECON 1021A/B Full Course Notes

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Because we trade with people in other countries, the goods and services that we can buy and consume are not limited by what we can produce. If we didn"t trade, we would have to produce on our within the ppftrade allows us to escape the boundaries and consume where previously was unattainable. Imports are the good and services that we buy from people in other countries. Exports are the goods and services we sell to people in other countries (we export to be able to buy imports) Goods account for more importing and exporting than services. The fundamental force that generates trade between nations is comparative advantage. The basis for comparative trade is divergent opportunity costs between countries (oranges in florida compared to growing oranges in canada). National comparative advantage: the ability of a nation to perform an activity or produce a good at a lower opportunity cost than any other nation.

Related Questions

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

Fill in the blanks. In case you get stuck, Iâve provided a list of all the missing words in alphabetical order at the end of the question. According to David Ricardoâs model, the pattern of trade between nations is determined by the distribution of ______________________ advantage. Unlike the ______________________ advantages described by Smith, Ricardoâs explanation allows for trade between partners in which one nation has superior ______________________ in the manufacture of all goods. Thatâs because Ricardoâs principle rests on the economic concept of ______________________ (defined as the amount of good Y that must be sacrificed when the nation produces a unit of good X) which can never be concentrated in just one nation. The model is usually specified with barter-style trade, meaning that we use ______________________ rather than ______________________ prices for the tradable goods. The price of each good on international markets must be higher than ______________________ in the exporting countries and lower than ______________________ in the importing countries. Although all parties can benefit from trade, there is no reason to think that they benefit equally. The ______________________ are derived from the difference between the opportunity costs of production in each nation and then distributed between participating nations according to the market price. As the price of a nationâs ______________________ good rises, it receives a larger share of the gains from trade, and we say that its ______________________ are appreciating. However, nations that ______________________ this good will receive a smaller share of the benefits from trade.

Absolute

Comparative

Export

Gains from trade

Import

Max WTP

Min WTA

Money

Opportunity cost

Productivity

Relative

Terms of trade

tansnake161

In the first chapter, we learned about the concept of specialization and comparative advantage. By learning these concepts, we tend to agree that specialization along the lines of comparative advantage and then the trade is beneficial. As Adam Smith stated in his book, The Wealth of Nations, he said that no "prudent master [will] make at home what it will cost him more to make than buy."

Now, consider the outsourcing scenario, where American firms have foreign firms/countries produce certain goods or services for them instead of producing them in the US.

Issues to discuss:

In your opinion, does outsourcing create problems for the US economy?

In your opinion, should we restrict trade with foreign firms/countries who produced these goods and services?

Keep in mind that there is no right or wrong answer for these types of questions. Just make sure you provide explanations/facts/data to back up your opinion.

redimpala897

Economics 1021A/B Lecture Notes - Deadweight Loss, Economic Surplus, Import Quota

ECON 1021A/B Full Course Notes

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