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23 Cards in this Set
- Front
- Back
The gains from Trade
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- 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 |
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The improvements in national Welfare is known as the
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gains from trade
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When economists talk about the gain from trade
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Benefits of trade outweigh the losses
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The Wealth of Nations attacked mercantilism-
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the system of nationalistic economics thought in the 1700's
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Mercantilism
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economic philosophy that favors strict limits on imports and strong support for exports
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Adam Smith proved wrong the belief
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that trade was a zero sum game
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zero sum game
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That the gain of one nation from trade was the loss of another
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Positive sum game
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Voluntary exchange is a positive sum game-both nations gain
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What happens to a country that does not have absolute productivity advantage in anything?
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Even if a country does not have any goods with an absolute productivity advantage, it can still benefit from trade
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Absolute Advantageand the Gains from Trade
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The idea that nations benefit from trade has nothing to do with whether a country has an absolute advantage in producing a particular good
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Production Possibilities Curve
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A production possibilities curve (PPC) shows the tradeoffs a country faces when choosing between two goods
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Absolute productivity advantage
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Held by a country that produces more of a certain good per hour worked than another
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Comparative productivity advantage (or comparative advantage)
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Held by a country that has lower opportunity costs of producing a good than its trading partners do
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Comparative advantage allows a country that lacks absolute advantage
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to sell its products abroad
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The Hecksher-Ohlin Theorem
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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
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Factor abundance versus factor scarcity
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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
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The Hecksher-Ohlin Theorem
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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 |
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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
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The PPC is curved because production costs are increaseing
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The Stolper-Samuelson Theorem
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Predicts the income distribution effects of trade
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The Stolper-Samuelson Theorem Assumptions
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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 |
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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 |
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The Impact of Trade on Wages and Jobs
In the medium- and long-run, |
trade has very little effect on the number of jobs
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The abundance or scarcity of jobs is a function of
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(1) labor market policies,
(2) incentives to work, and (3) government macroeconomic policies |