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Chapter 33

ECO100 Chapter 33- The Gains from International Trade.docx

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Kalina Staub

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Chapter 33- The Gains from International Trade • Increasing world trade shows that:  International trade is very important to Canada  Exports and imports are roughly the same size; the volume of trade is much larger than the balance of trade (value of exports minus the value of imports)  In most of the industry groupings, there are significant amounts of both imports and exports; intra industry trade 33.1 The Gains from Trade • Open Economy- An economy that engages in international trade • Closed Economy- An economy that has no foreign trade (autarky) • Causes and consequences are simply an extension of the principles governing trade between domestic firms and individuals Interpersonal, Interregional, and International Trade • Without trade, everyone must be self-sufficient; with trade, people can specialize in what they do well and satisfy other needs by trading • With trade, each individual, region, or country is able to concentrate on producing g/s that it produces efficiently while trading to obtain g/s that it doesn’t produce efficiently • The living standards of all the inhabitants of all regions will be higher when each region specializes in products in which it has some natural or acquired advantage and obtains other products by trade than when all regions seek to be self-sufficient • Gains from Trade- The increased output attributable to the specialization according to comparative advantage that is made possible by trade Illustrating the Gains from Trade • Absolute Advantage  Absolute Advantage- The situation that exists when one country can produce some commodity at lower absolute costs than another country; least amount of resources used to produce g/s; based on productivities  Example: some countries have access to cheap natural resources or better- trained workers or more sophisticated capital equipment, are low cost producers for a wide range of products • Comparative Advantage  Comparative Advantage- 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 costs  Just because a country may have an absolute advantage in all goods, it cannot have a comparative advantage in all goods; and just because a country may be inefficient in absolute terms and thus have an absolute disadvantage in all goods, it cannot have a comparative disadvantage in all goods  The gains from specialization and trade depend on the pattern of comparative, not absolute, advantage  World output increases if countries specialize in the production of the goods in which they have a comparative advantage  Specialization of production against the pattern of comparative advantage leads to a decline in total world output  Difference in the slope of the PPB reflects differences in comparative advantage; steep PPBs indicate that the opportunity cost of producing a product in one country is less than that in another country  Conclusions about the gains from trade arising from international differences in opportunity costs: 1. The opportunity cost of producing X is the amount of output of other products that must be sacrificed in order to increase the output of X by one unit 2. Country A has a comparative advantage over Country B in producing a product when the opportunity cost of production in country A is lower; implies that it has a comparative disadvantage in some other product(s) 3. When opportunity costs for all products are the same in all countries, there is no comparative advantage and there is no possibility of gains from specialization and trade 4. When opportunity costs differ in any two countries and both countries are producing both products, it is always possible to increase production of both products by a suitable reallocation of resources within each country The Gains from Trade with Variable Costs • If costs vary with the level of output, or as experience is acquired via specialization, additional gains are possible: • Economies of Scale  An increase in the size of the market, even in a large economy, may allow the exploitation of some previously unexploited scale economies in individual product lines  In industries with significant scale operations, small countries that do not trade will have low levels of output and therefore higher costs  With international trade, however, small countries can produce for the large global market and thus produce at lower costs; international trade therefore allows small countries to reap the benefits of scale economies • If costs vary with the accumulated experience in producing a product over time, additional gains are possible: • Learning by Doing  Learning by Doing- The reduction in unit costs that often results as workers learn thr
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