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Chapter 33

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Queen's University
ECON 110
Ian James Cromb

Chapter 33: The Gains from International Trade Part One The Gains from Trade  Open economy: An economy that engages in international trade.  Closed Economy: An economy that has no foreign trade. Interpersonal, Interregional, and International Trade Individuals  Without trade, each person would have to be self-sufficient  Would have extremely low standards of living as people are not good at doing everything  Trade allows for people to specialize in what they do well in o Buy/trade for the other things they cannot produce Interregional  Without trade, each region would have to be self-sufficient  Trade allows for regions to specialize in producing things in which it has a natural adv. o Cool regionswheat o Hot regionsbananas, sugarcane, coffee beans, etc. o Mountain regionsMining and forestry products  Living standards of the regions would be higher with trade International  Like regions & individuals, countries also gain from specialization and international trade  Produce the goods that you’re best atmore efficient & use less resources  Buy/trade for the other things they do not produce Illustrating the Gains from Trade Absolute Advantage – Refer to page 846  This situation exists when one country can produce some commodity at a lower absolute cost than another country  Absolute cost: The dollar cost of the labour, capital, and other resources that are required to produce a good.  Even though a country has an absolute advantage for every product they should still trade Comparative Advantage – Refer to page 846  The situation that exists when a country can produce a good with less forgone output of other goods than can another country.  Based on opportunity cost, rather than absolute costs  May have the absolute adv but countries cannot have the comparative adv. for everything o Countries specialize in making the product(s) that have the lowest opportunity cost.  Total world production will increase if countries devote more resources to one or few areas rather than trying to produce everything The Gains from Trade with Variable Costs Economies of Scale  Reduction of long-term average costs resulting from an expansion in the scale of a firm’s operations so that more of all outputs are being used  Production costs fall as the scale of output increases o The larger the operations the more efficiently machinery can be used  Small countries whose domestic markets are too small to exploit economies of scale would find it hard to become self-sufficient  With international trade, small countries can produce for the global market and incur lower costs  This allows for all countries to benefit from economies of scale. Learning by Doing  The reduction in unit costs that result as workers learn through reputedly performing the same tasks People become more efficient & learn how to do it better  Countries cannot smugly assume that their existing comparative advantage will persist o Learning by doing can allow other countries to become more efficient than the existing leaders Sources of Comparative Advantage Different Factor Endowments  All countries are endowed with different resources that will affect their comparative advantages with certain products  Countries will have comparative advantages in the production of goods that use intensively the factors of production with which they have in abundance.  Ex. Canada is abundantly endowed with forests o We have a comparative advantage for paper, raw lumber, wooden furniture Different Climates  All countries have different climates that allow them to produce certain goods o Not all produce produced in Florida can be produced in Ontario Human Capital  Many countries have acquired skills in certain product areas that give them a comparative advantage th o Early in the 19 century, Germans had a lot of children in trade schools. As a result Germany had a comparative advantage in many consumer goods that took skill to produce  electric razors, cake mixers, blenders o Persians (Iranians) produced high quality carpets for centuries and this acquired skill gave them a comparative advantage that they still have Acquired Comparative Advantage  If firms fail to innovate and adopt technologies in their industry and other foreign competition does, the first country will eventually lose their comparative advantage  Due to international competition, no country’s comparative advantage is idly secure Chapter 33: The Gains from International Trade Part Two The Determination of Trade Patterns  So far, comparative advanta
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