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23 Cards in this Set

  • Front
  • Back
The gains from Trade
- Adam Smith and the Attack on Economic Nationalism
- A simple Model of Production and Trade
- Absolute Productivity Advantage and Gains from Trade
Case Study: Comparative Adv in a Single Natural Resource
The improvements in national Welfare is known as the
gains from trade
When economists talk about the gain from trade
Benefits of trade outweigh the losses
The Wealth of Nations attacked mercantilism-
the system of nationalistic economics thought in the 1700's
Mercantilism
economic philosophy that favors strict limits on imports and strong support for exports
Adam Smith proved wrong the belief
that trade was a zero sum game
zero sum game
That the gain of one nation from trade was the loss of another
Positive sum game
Voluntary exchange is a positive sum game-both nations gain
What happens to a country that does not have absolute productivity advantage in anything?
Even if a country does not have any goods with an absolute productivity advantage, it can still benefit from trade
Absolute Advantage and the Gains from Trade
The idea that nations benefit from trade has nothing to do with whether a country has an absolute advantage in producing a particular good
Production Possibilities Curve
A production possibilities curve (PPC) shows the tradeoffs a country faces when choosing between two goods
Absolute productivity advantage
Held by a country that produces more of a certain good per hour worked than another
Comparative productivity advantage (or comparative advantage)
Held by a country that has lower opportunity costs of producing a good than its trading partners do
Comparative advantage allows a country that lacks absolute advantage
to sell its products abroad
The Hecksher-Ohlin Theorem
The HO model states that a country’s factors of production (a country’s endowments of inputs) are used to make each good give rise to productivity differences between countries
Factor abundance versus factor scarcity
When a country enjoys a relative abundance of a factor, the factor’s relative cost is less than in countries where the factor is relatively scarce
The Hecksher-Ohlin Theorem
A country’s comparative advantage lies in the production of goods that use relatively abundant factors

Predicts which goods will be exported

Factor abundance versus factor scarcity
As with constant costs, the tradeoff between bread and steel is equal to the slope of the PPC; however, since the PPC is curved, tradeoff is different at each point of production
The PPC is curved because production costs are increaseing
The PPC is curved because production costs are increaseing
The Stolper-Samuelson Theorem
Predicts the income distribution effects of trade
The Stolper-Samuelson Theorem Assumptions
Labor earns wages proportionate to its skill level

Owners of capital earn profits

Landowners earn rents

The amount of income earned per unit of input depends on both the demand for inputs and the supply of inputs (demand for an input = derived demand)

If an output is in high demand, its price is high and the inputs used to produce it receive higher returns
The Impact of Trade on Wages and Jobs

The the Short-run
(1) reduce jobs in an industry that is not competitive vis-à-vis foreign industries and

(2) increase jobs in competitive industries
The Impact of Trade on Wages and Jobs

In the medium- and long-run,
trade has very little effect on the number of jobs
The abundance or scarcity of jobs is a function of
(1) labor market policies,
(2) incentives to work, and
(3) government macroeconomic policies