Econ 2023 1st Edition Lecture 9 Outline of Last Lecture I. Test one recently taken. Start of new material for next test. Outline of Current Lecture II. Trade.III. Absolute v comparative advantage.a. Law of comparative advantageIV. Gains from trade.V. Terms of trade.VI. Barriers of trade.Current Lecture1. Trade: an extension of market exchange across national borders.a. Nations trade for the same reason that individuals engage in trade/exchange- to reduce the limits imposed by scarcity.b. Why trade? Differences in technologies (production functions), differences in resourceendowments (productivity due to, say, different capital endowments. c. The role of trade: trade has had a significant impact on culture, history, politics, economies, etc.2. Absolute vs. comparative advantage.a. Absolute advantage: “In economies, the principle of absolute advantage refers to the ability of a party to produce more number of a good product or service than competitorsfor higher opportunity costs…b. Comparative advantage: is based on the relative opportunity cost of production acrosspotential trade partners.i. Recall: the opportunity cost of an activity is the highest valued alternative forgone. Divergent opportunity costs underlie comparative advantage to form the economic basis for trade. Lower opportunity costc. Key: Lower cost (absolute advantage) vs. Lower opportunity cost (comparative advantage).d. Law of comparative advantage: the key to the law of comparative advantage is opportunity cost. The Law is the guiding principle of trade or exchange, and of international trade in particular. If nations have different opportunity costs of These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.production, then voluntary trade among nations will benefit all trading nations if each specializes in the production of the good in which it has the lower opportunity cost.i. Major implications: advanced economies and developing counties can enjoy a symbiotic relationship through trade. A technologically advanced country is likely to forego a great deal of production and incur a relatively high opportunity cost to produce some goods, while a less advanced nation can likely produce the same good at a relatively low cost…3. Gains from trade: Refers to net benefits to agents from allowing an increase in voluntary trading with each other. In technical terms, it is the increase of consumer surplus producer surplus from trade. Therefore well-being is enhanced. a. Production possibilities: the alternative combinations of goods and services that couldbe produced by an economy within a given period of tie given the available resources and technology.b. Consumption possibilities: the alternative combinations of goods and services that could be consumed by an economy …c. Autarky: an economy that does not trade with other economies has identical production and consumption possibilities. Trading enhances the consumption possibilities available to people in the trading nations.4. Terms of trade: the quantity of goods and services that a country exports to pay for its imports of goods and services. 5. Barriers to trade.a. Tariffs: i. More commonly known as “duties” (think of “duty free shops”)ii. Taxed on Imports: ( and occasionally on outputs)1. Two types: Specific tariff: a fixed amount of money per item. Ad valorem tariff: a percentage of an item’s value.iii. Tariffs indirectly restrict trade by raising import prices, hence reducing their quantities demanded. iv. Tariffs have three primary functions:1. To serve as a source of revenue: historically, tariffs were a major sourceof income for governments.2. To protect domestic industries.3. To remedy trade “distortions”: this is a punitive function undertaken to retaliate against another country’s “unfair” trade practices. b. Quotasc. Voluntary export restraints (VERs)d. Reducing barriers to trade:i. Trade