ECON 2304 Lecture Notes - Lecture 9: Demand Curve, Economic Surplus, Comparative Advantage
Document Summary
Countries can gain from trade if each exports the goods in which it has a comparative advantage: this chapter tries to see where the gains come from and who gets them. World price (pw) the price that prevails in the world markets. Domestic price (pd) the price without trade. If pd < pw: country has comparative advantage in the good. If pd > pw: country does not have comparative advantage. Price taker its actions have no effect on pw: usually related to a small economy, when a small economy engages in free trade, pw is the only relevant price. Example: country that exports soybeans: w/o trade. Total surplus = a + b +c: w/ trade. Ps = b + c + d (producers benefit) Total surplus = a + b + c + d. Part d is the area where the producers are able to sell their goods to buyers from other countries. Example: trade of tvs: pd = .