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Trade Analysis Analyzing Trade Problems using a 4-step process

Learn how to analyze trade problems using a 4-step process, including constructing trade tables, determining comparative advantage, assigning production, and establishing terms of trade.

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Trade Analysis Analyzing Trade Problems using a 4-step process

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  1. Trade AnalysisAnalyzing Trade Problems using a 4-step process

  2. 4-step process to solve all trade problems: • 1) Construct a trade table with numerical ratios of trade-offs: • Determine which country has an absolute & comparative advantage in each good • Determine which country will produce which good • Find the range of acceptable trade that makes each country better off. • Terms of Trade Coffee 1000 1000 Coffee 500 Wheat 1000 Wheat

  3. Coffee Coffee BRAZIL 1000 1000 MEXICO STEP #1 Set up an Opportunity Cost Table 1000 500 Wheat Wheat Opportunity Cost Table BRAZIL MEXICO 1 Coffee = ____ Wheat 1 Coffee = _____ Wheat 1 Wheat = ____ Coffee 1 Wheat = ____ Coffee (gain) (cost) 1/2 1 1 2

  4. Brazil: 1000 Coffee or 1000 Wheat STEP #2 Determine who has a: ABSOLUTE/COMPARITVE ADVANTAGE Mexico 1000 Coffee or 500 Wheat BRAZIL MEXICO 1 Coffee = __1__ Wheat 1 Coffee = __1/2___ Wheat 1 Wheat = __1__ Coffee 1 Wheat = __2__ Coffee Equally efficient at Coffee Absolute Advantage Wheat Comparative Advantage Wheat Equally efficient at Coffee Comparative Advantage Coffee • Step #3 • Determine who will produce which good Mexico produces Coffee & Brazil produces Wheat

  5. Step #4 Develop Terms of Trade Ranges for Efficient Trade(Terms of Trade) BRAZIL MEXICO 1 Coffee = ____Wheat 1 Coffee = _____ Wheat 1 Wheat = ____ Coffee 1 Wheat = ____Coffee wheat 1 1/2 coffee 1 2 Wheat Trading: must be higher than the opportunity cost 300 wheat 400 coffee = .75 Mexico must buy wheat at a ratio above ½ wheat per coffee Coffee Trading: must between higher than the opportunity cost Brazil must sell Wheat at a ratio below 1 wheat per coffee 300 wheat 400 coffee = 1.33 Terms of Trade:above ½ & below 1 wheat per coffee or above 1 & below 2 coffee per wheat

  6. Graphing Trade Graph a beneficial Trade BRAZIL MEXICO Coffee 1000 1000 .(300, 600) after trade Coffee .(700, 400) * (500,500) after trade * (250,500) 500 Wheat 1000 Wheat Trade Example: BRAZIL MEXICO 400 Coffee 0 Coffee 1,000 Wheat 1,000 Coffee 0 Wheat 300 Wheat

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