Chapter 2 Comparative Advantage.ppt

* * * * * * * * * * * * * * * * * * * * * * * * * * Copyright ? 2009 Pearson Education, Inc. Publishing as Prentice Hall 2 – * C h a p t e r 2 To accompany International Economics, 3e by Sawyer/Sprinkle PowerPoint slides created by Jeff Heyl Copyright ? 2009 Pearson Education, Inc. Publishing as Prentice Hall Why Countries Trade CHAPTER ORGANIZATION Introduction International Trade Versus Interregional Trade Trade in an Individual Product Trade Based on Absolute Advantage Trade Based on Comparative Advantage Trade Based on Opportunity Costs Dynamic Gains from Trade Summary INTRODUCTION Why do countries trade with one another? What specific benefits can countries obtain through international trade? Which country produces which good(s)? Why do countries export and import certain goods? At what prices do countries exchange exports and imports? How does international trade differ from interregional trade? INTERNATIONAL TRADE VERSUS INTERREGIONAL TRADE Interregional trade: sale and purchase of goods services within national bounds SE----cotton NYC----financial services International trade sale and purchase of goods services across national bounds INTERNATIONAL TRADE VERSUS INTERREGIONAL TRADE WHY do we TRADE? Min (Production_$, purchasing_$) Larger profit prospects in moving goods from their production area to be sold elsewhere at a higher price TRADE IN AN INDIVIDUAL PRODUCT Trade concerns: loss of domestic jobs keep money within the US national security risks workers treated unfairly All countries can benefit via specialization and trade Example: U.S. and India’s trade in cloth TRADE IN AN INDIVIDUAL PRODUCT Figure 2.1 The Effects of Trade on Production, Consumption, and Price of Cloth Price of Cloth Quantity of Cloth U.S. Cloth Market PUS p* E c d Q1 Q2 QUS SUS DUS Imports Price of Cloth Quantity of Cloth India’s Cloth Market p* PINDIA Exports a F b Q3 Q4 QINDIA SINDIA DINDIA Points E and F represent equilibrium points in autarky where there