Trade and Technology Flashcards
why do countries trade
- differences in technology used
- differences in total amount of resources in each country
- differences in costs of offshoring
- proximity of countries to each other
what is offshoring
producing various parts of a good in different countries and assembling in final location
the ricardian model shows…
how trade can be explained by technological differences across coutnries
assumptions of ricardian model
- 2 countries
- 1 factor of production
- 2 goods
- constant marginal product of labour (MPL)
general concepts of ricardian model
- autarky equilibrium
- international trade equilibrium
- home export supply curve
- foreign import demand curve
what is MPL
extra output obtained by using one more unit of labour
indifference curve shows…
combinations of two goods that they country can consume and be equally satisfied
zero profit condition is when…
price = marginal cost (MC)
price =
wage x labour units
country has comparative advantage when…
has lower opportunity costs of producing a good than another country
comparative advantage vs absolute advantage
comparative
- uses opportunity costs (ratio of MCs)
absolute
- uses actual costs (levels of MCs)
two countries are in equilibrium when…
1) relative price of each good is same in both countries
2) amount of each good the countries want to trade is equal
3 gains from trade for home and foreign
1) each country reaches high utility
- utilitarian formulation
2) each country enlarges consumption opportunities
- utility free formulation
3) workers receive higher real wages
export supply =
excess supply x (domestic supply - domestic demand)
import demand =
excess demand x (domestic demand - domestic supply)
export supply curve vs import demand curve
- export supply curve captures behaviour of producers and consumers in exporting country
- import demand curve captures behaviour of producers and consumers in importing country
walrus’ law implies…
if there are 2 markets and 1 is in equilibrium, the other must also be in equilibrium
terms of trade (TOT) defined by…
price of country’s exports / price of country’s imports
why is increase in TOT welfare improving?
country will earn more from exports or will pay less for imports
gains from trade captured in 3 ways
1) increase in utility
2) increase in consumption opportunities
3) increase in real wages
labour market equilibrium characterised by 2 conditions
- labour demand = labour supply
- equality of wages
