Lecture 8: International Trade Flashcards
Reasons for trade
Mutual benefits from differences in countries:
* Technologies
* Endowments of capital & labour, natural resources etc.
* Consumer tastes
Gains from trade
Allows scarce resources to be allocated in more efficient ways however, these gains are not always equal which is where trade policy comes in
Absolute advantage
Occurs when a country can produce more of a good than any other country for a given amount of input - however a country can benefit from trade even if they don’t have absolute advantage
Comparative advantage
When a country can produce a good at a lower opportunity cost compared to any other good
What is the insight of the Ricardian model?
That only comparative advantage matters in international trade
Ricardian production possibility frontier
What does it describe and formula
Describes what a coutnry can produce on its own.
Y(s) = A(s)L - [A(s)Y(m)]/[A(m)]
Consumption of S and M formulas
C(m) = theta*[wL]/[p(m)]
C(s) = (1-theta)x[wL]/[p(s)]
Prices in each sector formula and identity to get to this
Price = marginal cost in perfectly competitve firms
p(m)=w/A(m) and same for services
Relative prices
p(m)/p(s) = A(s)/A(m)
Relationship between consumption and output with no trade in domestic and global markets
Consumption = Output
with foreign comsumption and output marked with an *
Relationship between consumption and output with free trade in domestic and global markets
Comsumption in home and domestic added = Output in home and domestic added (for each sector)
Where is the consumer surplus on the diagram?
Below the demand curve but above the price
Where is the producer surplus on the diagram?
Above the supply curve but below the price level
How to find labour of each country with free trade?
Whichever has competitive advantage (the lowest relative price for that sector) dows all the producing and thus, has all of the given labour for that industry.
How to find exports and imports for each country
- Find consumption for the industry where the country has comparative advantage (relative price lowest)
- Subtract this number from the total production of this country to find the amount they export and the amount imported to the other country (this is the same number)
