ECON 1050 Lecture Notes - Lecture 7: Deadweight Loss, Voluntary Export Restraints, World Trade Organization

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6 Jan 2016

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Econ 1050 chapter 7 notes: global markets in action. The goods and services that we buy from other countries are our imports. Our goods and services that we sell to other countries are our exports. International trade today- trillion dollars every year. What drives international trade- comparative advantage is the fundamental force that drives international trade. Comparative advantage is a situation in which a nation can perform an activity or produce a g/s at a lower opportunity cost than any other nation. For example, it costs less to produce t-shirts in china than. When the world price to produce a good is lower and we import, a larger quantity is bought compared to if we were to make all of them ourselves. Gains and losses from imports- in the importing country, the. Winners, losers, and the net gain from trade winners are those whose surplus increases and the losers are those whose surplus decreases.

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Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

skybee160

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International trade can improve efficiency in the use of global resources to make all parties better off. If no one can deny the power of comparative advantage and gains from trade, then why do we continue to resist? Trade happens because we want to sell goods to people in other countries, and we want to buy stuff that is produced in other countries. With individual decision makers acting in self-interest, do you think anyone is watching out for the global economy?

http://www.bbc.co.uk/news/business-29572475 (Links to an external site.)

4. (Part A) Suppose the USA and China are considering whether to engage in trade. Here are the production possibilities of the two countries before trade occurs:

Table 1. Production of Apparel or Chemicals in the USA and China.

The Opportunity Costs of producing one product or the other are displayed.

1000âs of Tons of

Apparel Units Chemicals

Nation Produced or Produced

USA 50 or 150

China 30 or 60

Which nation has the comparative advantage in producing Apparel? Which nation has the comparative advantage in producing chemicals? Explain how you arrived at these conclusions.

Explain the Law of Comparative Advantage, and its application to trading relationships between nations. In the example above, if the two nations decide to engage in mutually beneficial trade, which nation should specialize in producing Apparel and which nation should specialize in producing Chemicals, and Why?

Suppose a trade proposal is made to exchange 1 thousand units of apparel for 2.5 tons of chemicals. Would these terms of trade (1 Apparel : 2.5 Chemicals ) be acceptable to, and mutually beneficial for, both the USA and China as trading partners? Why or why not?

What are the âpayoffsâ from open trade? What are some of the limitations associated with open trade?

4. (Part B) Suppose the USA and EU are trading, and currencies must be exchanged as goods/services are imported and exported between the two regions. The $USD is the currency of the USA, and the â¬Euro is the currency of the EU.

a. Are the following statements correct or incorrect? Why or why not?

âIf the USA is exporting its goods to the EU, these exports from the USA to the EU create a demand for â¬Euros in the Currency Exchange Market for â¬Euros.â

âIf the USA is importing goods from the EU, these imports to the USA from the EU create a supply of $USD in the Currency Exchange Market for $USDâs.â

âIf the EU is importing goods from the USA, these imports to the EU from the USA create a demand for $USD in the Currency Exchange Market for $USDâs.â

Throughout your answer to any of these other questions, use graphs as needed (all axes and functions completely labeled) to accompany your written analyses.

ECON 1050 Lecture Notes - Lecture 7: Deadweight Loss, Voluntary Export Restraints, World Trade Organization

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