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Chapter 17

ECON 200 Chapter Notes - Chapter 17: Autarky, Economic Surplus, Factor Endowment

Course Code
ECON 200
Cindy Clements

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Chapter 17: International Trade
Comparative advantage
Absolute advantage- the ability to produce more of a good than others with a
given amount of resources
Comparative advantage- the ability to produce a good or service at a lower
opportunity cost than others can
Gains from trade- the increase in welfare in both countries that results from
specialization and trade
Each country can produce the goods that it has a comparative advantage at
producing, rather than the exact combination of goods its consumers want
Results in higher global production
Both countries can consume more than they were able to before
The roots of comparative advantage
When everyone responds to the profit motives they face as individual producers,
the invisible hand guides them to make products in which they have a
comparative advantage
Natural resources and climate
Climate affects what countries grow
Climate and geography can affect the costs of transporting goods to other
places once they are produced
Factor endowment
The relative abundance of different factors of production makes some
countries better suited to produce certain goods
A country with a lot of land relative to its population may have a
comparative advantage in land-intensive activities such as grazing cattle
or sheep
A country with plenty capital and little land might do well in more capital-
intensive activities such as producing high-tech electronics, providing
financial services, or biomedical research
○ Technology
Over time, technology tends to spread from country to country, equalizing
opportunity costs
At any given time, technology or production processes developed in
a particular country may give that country a temporary comparative
Incomplete specialization
Why doesn’t every country produce just one good?
No national economy is a perfectly free market, and neither is trade
between national economies
Specialization is often limited by trade agreements, which are
dependent on noneconomic considerations such as national
security, tradition, and not-so-rational politicking

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Those restrictions and political concerns put limits on how much
specialization we can expect
Even if trade was perfectly free, nations would not specialize completely
because within each country there are differences in the natural
resources, climate and relative factor endowment of different areas
From Autarky to Free Trade
Free trade between countries maximizes surplus, producing benefits for both
Just as free exchanges between individual buyers and sellers do
United States consists of many different industries, firms, and individual
Some of these will gain and some will lose from trade, although
the total gains will be higher than total losses
○ Autarky- an economy that is self-contained and does not engage in trade with
Impossible to import or export anything
Nothing produced outside the country is sold inside
Nothing produced inside the country is sold outside
The domestic price and quantity of a good is determined by the
intersection of the domestic supply and domestic demand curves
If an autarky decides to trade and begins importation:
A lower world price would push the domestic quantity demanded
up and the domestic quantity supplied down
The gap between them is made up by product import
○ Imports- goods and services that are produced in other countries and consumed
○ Exports- goods and services that are produced domestically and consumed in
other countries
Becoming a net-importer
When a country opens its market to trade and the world price is lower
than the domestic price, the domestic price will fall to meet the world price
At the lower price, domestic quantity demanded increases, but
domestic quantity supplied decreases
Imports will make up the difference between the quantities
domestically supplied and demanded at the world price

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The domestic supply and demand curves themselves have not shifted
Trade doesn’t affect the quantity that consumers want to buy at
any given price, or the quantity that domestic producers are willing
to sell at any given price
Allows consumers to buy at a price where domestic demand
doesn’t equal domestic supply
Total quantity supplied still has to equal total quantity demanded
at the equilibrium price
That part of that supply can come from international
Consumer and producer surplus in the market for a good changes when
the U.S goes from autarky to free trade:
When a country opens up to trade and becomes a net-importer
of shirts, consumer surplus in the shirt market increases, while
producer surplus decreases
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