ECON 221 Lecture 9Outline of Last Lecture I. Supply and demand model applicationII. Quantity controlsIII. Tradea. International tradeb. Gains from tradeIV. Price ControlsV. Government interventionOutline of Current Lecture I. Advantages II. TradeIII. World MarketsIV. ConsequencesCurrent Lecture Autarky – no tradeo Producers can gain from specializing in their comparative advantages, there can always be gains from trade. o Relative to a world without trade, trade can lead to benefits for all Example: Two people on the island. Both had 10 hours per day.o Ann – takes 1 hour to find a coconut, 2 hours to catch a fish.o Bob – takes 2.5 hours to find a coconut, 0.5 hours to catch a fish.o Opportunity costs – what they have to give up to get something else. o We want to find who has AA and CAThese 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. Absolute Advantage – Producer has AA in a good if they can produce the most of it (spends all time producing that good). Comparative Advantage – Producer has CA in a good if they have the lowest OC of producing it (if they give up the least to produce it). Trade – o Gains from trade in international markets Comparative advantage -> gains from trade If CA -> export If not -> importo Comparative advantage stems from some combination of Climate Factor endowments (lots of labor, etc.) Technology International trade in marketso Start with domestic supply & demand with no tradeo Also a world marketo Now open up to trade with rest of the world Domestic buyers and sellers can buy/sell in domestic market OR world market ata world price IMPORTANT ASSUMPTION: no county is large enough to impact world price. Sellers must chose whether to sell domestically or internationally, to want to selldomestically they must receive world price.o Difference between quantity supplied and quantity demanded used to simply be a surplus, now it is surplus to be sold abroad. o So if domestic price is lower than world price, export. Domestic prices are lower when domestic producers can produce the good for lower (opportunity) costs than foreign producers. Lower OC -> CA -> Export By opening up to trade, buyers are now worse off – having to pay world prices for goods. Total surplus expands o World price < Domestic price -> Import Domestic producers have to sell good at world price (otherwise the won’t sell anything) Creates what would otherwise be a shortage – but world market makes up for the shortage.o World price > Domestic price -> Export Domestic buyers are forced to by a good at world price (because there are plenty of buyers in the world market willing to pay higher price) “Domestic surplus” – made up for by exportso Welfare consequences? Imports- Increase CS, Decrease PS Exports- Increase PS, Decrease CS Both increase
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