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[ECO100Y1] - Midterm Exam Guide - Everything you need to know! (26 pages long)Premium

26 pages266 viewsFall 2016

Department
Economics
Course Code
ECO100Y1
Professor
Robert Gazzale
Study Guide
Midterm

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UTSG
ECO100Y1
MIDTERM EXAM
STUDY GUIDE
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Chapter 8: International Trade
Microeconomics
Focus of the chapter:
Why international trade occurs and why economists believe is it beneficial.
Definitions
Imports: Goods and services that come into a country
Ex. Japanese machinery, Florida oranges
Exports: Goods and services that leave a country and they are also made in that country
Ex. Maple syrup, oil from the tar sands
Globalization: is the phenomenon of growing economic linkages among countries
Ex. Nike opening up subsidiaries in different countries, it also boosts the economy over there
Production possibilities and Comparative Advantage
The potential production of other goods a country must forgo to produce an auto part is the opportunity
cost of that part
Comparative Advantage: a country has a comparative advantage in producing a good/service if the
opportunity cost of producing the good or service is lower for that country than for other countries
Ex. Vietnam has the ideal climate for shrimp, so it doesn’t take a lot out of them to sell the shrimp while it
would take a lot out of them to make high tech things. Canada doesn’t have the climate for shrimp but are faster
in making high tech things. Each country has a comparative advance in something
Relative price
That no country pays a relative price greater than its opportunity cost of obtaining that good in autarky.
Ricardian model of international trade
Is the belief that international trade is analyzed with the assumption that opportunity costs are constant
This line of thinking provides the PPF to have a straight line while it would be more bowed out
Autarky
A situation when country doesn’t trade with anyone else, it is self sufficient
Comparative Advantage Vs Absolute Advantage
Case study: Automobile parts making in Canada vs Mexico
Mexico has less skilled labour so they have nothing better to do than make these car parts
Canada has more skilled labour so instead of spending time on these parts they can be doing more useful
things for the country
Mexico has a low wage also shows that the labour is not as intense and demanding as compared to
Canada
Two main misperception when it comes to trade between a high-wage and a low-wage country
1. Sweatshop labour fallacy: is the belief that that trade must be bad for workers in poor exporting
countries because those workers are paid very low wages by our standards.
2. Pauper labour fallacy: is the belief that when a country with high wages imports stuff produced in
countries with low wages, this must hurt the standard of living in the importing country
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Sources of Comparative Advantage
Three main sources of why comparative advantage exist
1. Differences in Climate
Tropical countries have the ability to make products like chocolate, coffee, sugar, banana and shrimp… It is
a lot cheaper for them to make this than some other countries. Trade is also driven by the difference of
seasons if a certain fruit is out of season in Canada it may be fresh in New Zealand.
2. Differences in Factor Endowments
This has to do with what a country has in terms of its lands and factor of production, (Ex, Canada and its
forestland that can be used for lumber)
The comparative advantage model that compares it with factor availability is called the “Heckscher –
Ohlin Model”,
The two key concepts in the model are
1. Factor abundance: refers to how large a country’s supply of a factor is relative to its supply of others
factors
2. Factor intensity: refers to the fact that producers use different ratios of factors of production in the
product of different goods. Ex, oil refineries use much more capital per worker than clothing factories.
According to the model
“A country that has an abundant supply of a factor of production will have a comparative advantage in goods
whose production is intensive in that factor”
3. Differences in Technology
Finding a direct cause to this if difficult, some can say its based on history.
Ex. Switzerland has been making watches for a long time so now they just happened to get very good at it.
Sometimes they are a result of a set of innovations that for some reason occur in one country and not the
other
The country does through something the other countries have not gone through
Ex. Japan has frequent earthquakes something that forces them to think ahead that everybody else.
Technological advance can able so acquired with government funding and support.
Supply, Demand and International Trade
This is needed when analyzing the effects of international trade and understand trade policy
The effects of imports
Domestic demand curve: shows how the quantity of a good demand by domestic consumers, depends on the
price of that good. This helps us distinguish between the domestic consumers and foreign consumers.
Domestic supply curve: shows how the quantity of a good supplies by domestic consumers depends on the
price of that good. Also needed to distinguish between foreign and domestic
GO OVER THE GRAPHING SECTION IN THE TEXTBOOK, DRAW EVERYTHING OUT
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