Microeconomics - Comparative Advantage and International Trade
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How countries use comparative advantage and international trade to increase economic value. And how policies affecting international trade, also affect domestic market.
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Microeconomics - Comparative Advantage and International Trade
- 1. Group 1 Abhimanyu Sangwan Bhawna Mehta Kushal Agarwal Nimish Deep Tanay Tripathi Gobind Singh Maini COMPARATIVE ADVANTAGE AND GAINS FROM INTERNATIONAL TRADE
- 2. What is comparative advantage? Ability of an individual, firm or country to produce a good or service at a lower opportunity cost than other producers. Cherries and apple example Autarky A situation in which a country does not trade with other countries.
- 3. The Gains from Trade OUTPUT PER HOUR OF WORK Cell Phones MP3 Players Japan 12 6 United States 2 4 OUTPUT PER HOUR OF WORK Cell Phones MP3 Players Japan .5 MP3 player 2 cell phones United States 2 MP3 players .5 cell phone Comparative Advantage in International Trade Source: Microeconomics by Hubbard and Brien
- 4. World Production PRODUCTION AND CONSUMPTION Cell Phones MP3 Players Japan 9000 1500 United States 1500 1000 PRODUCTION AND CONSUMPTION Before Trade After Trade Cell Phones 10500 12000 MP3 Players 2500 4000 Without Trade Does Anyone Lose as a Result of International Trade? NOT REALLY Source: Microeconomics by Hubbard and Brien
- 5. Why Don’t We See Complete Specialization? • Not all goods and services are traded internationally. • Production of most goods involves increasing opportunity costs. • Tastes for products differ.
- 6. How Countries Gain from International Trade • Climate and natural resources. This source of comparative advantage is the most obvious. • Relative abundance of labor and capital. Some countries, such as the United States, have many highly skilled workers and a great deal of machinery. • Technology. Broadly defined, technology is the process firms use to turn inputs into goods and services. • External Economies Reductions in a firm’s costs that result from an increase in the size of an industry.
- 7. The U.S. Market for Ethanol under Autarky Source: Microeconomics by Hubbard and Brien
- 8. The Effect of Imports on the U.S. Ethanol Market Source: Microeconomics by Hubbard and Brien
- 9. The Effects of a Tariff on Ethanol Source: Microeconomics by Hubbard and Brien
- 10. The Economic Effect of the U.S. Sugar Quota Source: Microeconomics by Hubbard and Brien
- 11. Why does Government restricts free trade? • Protectionism: Use of trade barriers to protect domestic firms from foreign competition. • Saving jobs • Protecting high wages • Protecting Infant Industries • 2 other factors at work • Costs of tariffs and quotas large in totality but small per person • Jobs lost are easy to identify; jobs created by foreign trade relatively easy
- 12. Critique of Trade Restrictions • Reduces Consumer benefit • Increases overall cost • Decreases competitiveness in market • Does not incentivize domestic firms to innovate
- 13. References BOOKS • Microeconomics by R. Glenn Hubbard and Anthony Patrick O. Brien WEBSITES • http://en.wikipedia.org/wiki/Import_substitution_industrialization