Why Counties Trade
Chapter 1
Why Counties Trade
anization
Introduction
International Trade Versus Interregional Trade
Trade in an Individual Product
Trade Based on Absolute Advantage
Trade Based parative Advantage
Trade Based on Opportunity Costs
The Production Possibilities Frontier and Constant Costs
The Terms of Trade
Trade Under Increasing Opportunity Costs
Dynamic Gains from Trade
Introduction
In this chapter, we first discuss international trade for a single product; we then discuss international trade based on Adam Smith’s theory of absolute advantage. Next, we explain the pattern of trade and the gains from trade based on David Richard's theory parative advantage. We also explain the theory parative advantage in terms of opportunity cost. Finally, we describe the gains from trade that are difficult to quantify and occur over time.
International Trade Versus Interregional Trade
Interregional trade is us buying from us and us selling to us (. Massachusetts buys cotton from Mississippi), while international trade is us buying from them and us selling to them-another country (. . buys coffee from Brazil).
Theory of “big black box”
Benefits of Trade:
-specialization and trade makes total world output of goods and services larger than it would be without trade.
Trade in an Individual Product
Conclusion: for an individual product, international trade equalizes the international price P*. As the figure illustrates, the . imports and India exports cloth at the international price.
effects of trade in two countries
Trade Based on Absolute Advantage
Concept of absolute advantage
An example:
the . has an absolute advantage in machine production, while India has an absolute advantage in cloth production.
15 yards of cloth
2 machines
India
10 yards of cloth
5machines
.
cloth
machines
country
One person per day of labor Products
Trade Based on Absolute Advantage
The gains from specialization and trade with
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