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Chapter 1

ECO230: Chapter 1 and 2

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University of Toronto St. George
Masoud Anjomshoa

ECO230Y1 September 9 , 2013 First chapter Word Notes  First part is focused on trade. Who benefits from trade, and who loses.  The second part is on exchange rate and how it affects other things.  As the nature of the trade is changing the economic theory has to adjust to explain the trade. For example, why a certain country is trading this and not something else  Because trade has changed, trade models that were explaining things half a  Trade models also tend century ago are not useful anymore. to change over time.  Why countries trade?  Countries trade because: - Differences in labor productivity. They are different. The whole idea is that - of differences in labor countries are different. What aspect matters for trade? a. Differences in labor productivity. Labor forces in one country may be productivity. good at producing certain things, while the other may be good in - Difference in producing another thing. technology - Difference in technology. Countries have different technology standards. - Different factor endowments - Difference in factor endowments. Fore example, some countries have an - Difference in short run abidance of oil. - Difference in short run fixity of factor. In short run you cannot change your fixity of factor factor. For example, in short run uoft cannot change the number of - Economies of scale buildings it has. Ti can however, fire or hire instructors. - Difference in tate - Difference in tastes. People have different tastes. - Imperfect competition - Economies to scale (a larger scale is more efficient) it isn’t how too know to produce things, but is it efficient to do so? Because it isn’t economical. - Imperfect competition. For example, apple sued Samsung and now galaxy is illegal in the United States. - Each factor influences the pattern of trade and determines the destitution of gain/losses between and within economies.  Trade pattern:  Change of trade pattern over time.  there were two waves of - There were two waves of globalization. We can define global opening as globalization: total gap - 1840 – 1914 - 1840-1914: due to seam power, railroads, telegraphs, telephones, - 1945 – present interrupted by world wars and depression. these causes the first round of globalization. The great depression caused countries to fight another. This interrupted the process of globalization - 1945- present: economies rely on modern phones, airplanes, computers, Internet, fibre options, GPS satellite. - In fact, up to 1930, the whole world was much more open then today. For example before you did not need visa to go anywhere. The world was much more open. -  Trade pattern and its components: - What things are dominating our trade?  out of everything that is - Most of the trade is focused on manufacturing. traded, manufactured  Share of manufacturing goods out of total trade of merchandise. goods is what dominates.  These days manufacturing goods are the most dominating part of trade. Sp far, all the statistics were about merchandise.  However, what about  trades and services are  Trade pattern and its components gradually increasing. - Trade and services is gradually increasing. Services such as shipping,  service outsourcing has insurance, legal services, and tourism. began to take place. about - Service outsourcing occurs when a firm that provides services moves its 19% of service jobs are operations t a foreign location. traedable and can be - Service outsourcing can occur for services that can be performed and potentially out sourced. transmitted electronically like customer service. 12% are tradable. - Service outstanding is currently not a significant part of trade, but about t19% of services jobs are ‘tradable’ and can be potentially out sourced. In comparison, about 12% of manufacturing jobs are ‘tradable’. Today out sourcing of services is much less of what it can be. … Trade goes up even more.  Trade part and its components: - Western Europe has the highest import/exports to the world. Why? Simply  EU, US, Canada, and because it is in the middle of it all. japan = the Quad, however - EU, US, Canada and Japan, are the quad and dominate the whole world. China is becoming a major Trade flows. China has become important recently. player.  Who trades with whom? - Most of the trade activities happen within the regions than among the regions (intra- regions vs. Inter-regions.)  Most trading takes place - We have two factors: income and distance. If we are closer, we are more within regions (Intra- likely to trade. The similar income will likely lead to more trade as well. region vs. Inter-regions) -  Income and distance  Some stylized facts on trade: - Most of the trade activities happen within the region than among the also help determine trade regions (Intra-regions vs. inter- regions). This shows the role of distance. patterns. - The inter-regional trade flows are dominated but her
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