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International Economics By Robert J. Carbaugh 9th Edition

International Economics By Robert J. Carbaugh 9th Edition. Chapter 3 (B): Sources of Comparative Advantage. Bringing demand into the model. Indifference curves. Final pattern of trade depends not just on supply, but also on demand - which is determined by income & individual tastes

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International Economics By Robert J. Carbaugh 9th Edition

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  1. International EconomicsBy Robert J. Carbaugh9th Edition Chapter 3 (B): Sources of Comparative Advantage

  2. Bringing demand into the model Indifference curves • Final pattern of trade depends not just on supply, but also on demand - which is determined by income & individual tastes • Tastes can be shown graphically with indifference curves, which show the various combinations of two goods that give a consumer the same total level of satisfaction Carbaugh, Chap. 3

  3. Bringing demand into the model A consumer’s indifference map Carbaugh, Chap. 3

  4. Bringing demand into the model Indifference curves (cont’d) • Indifference curves have a negative slope • Keeping satisfaction constant means giving up some of one good for more of another • Indifference curves are convex • As the consumer gets more of one good, she is less willing to give up what is left of the other • The rate of substituting one good for another is shown by the slope of the curve, the marginal rate of substitution Carbaugh, Chap. 3

  5. Bringing demand into the model Indifference curves (cont’d) • “Higher” indifference curves (those farther from the origin) represent greater levels of satisfaction • Individual preferences cannot really be added up into a “community indifference curve” but it is useful to imagine that they can for the purposes of trade theory Carbaugh, Chap. 3

  6. Bringing demand into the model Indifference curves and int’l. trade Carbaugh, Chap. 3

  7. Bringing demand into the model Basis for trade, gains from trade Carbaugh, Chap. 3

  8. International equilibrium Equilibrium terms-of-trade limits Carbaugh, Chap. 3

  9. International equilibrium Theory of Reciprocal Demand (Mill) • Actual trading prices depend on the interaction of trading partners’ demands • Final terms of trade will be closer to the domestic price ratio of the nation with stronger demand for the imported good • Applies to nations of equal economic size, which will share gains nearly equally • Small nations trading with large ones can receive the bulk of the gains from trade Carbaugh, Chap. 3

  10. International equilibrium Offer curves: supply and demand Carbaugh, Chap. 3

  11. International equilibrium Offer curves: supply and demand Carbaugh, Chap. 3

  12. International equilibrium Equilibrium terms of trade Carbaugh, Chap. 3

  13. International equilibrium Changing equilibrium terms of trade Carbaugh, Chap. 3

  14. Impact of trade Immiserizing growth Carbaugh, Chap. 3

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