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tse.export/NTDMap.aspx?UniqueURL=knmmibzurairzmrtsmi3uw55-2007-1-23-16-19-33

http://tse.export.gov/NTDMap.aspx?UniqueURL=knmmibzurairzmrtsmi3uw55-2007-1-23-16-19-33. GAINS FROM TRADE. GAINS FROM TRADE SIMPLE COMPARATIVE ADVANTAGE. WHY DO NATIONS TRADE? TOTAL NATIONAL WELFARE IS INCREASED THROUGH TRADING ACTIVITIES.

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tse.export/NTDMap.aspx?UniqueURL=knmmibzurairzmrtsmi3uw55-2007-1-23-16-19-33

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  1. http://tse.export.gov/NTDMap.aspx?UniqueURL=knmmibzurairzmrtsmi3uw55-2007-1-23-16-19-33http://tse.export.gov/NTDMap.aspx?UniqueURL=knmmibzurairzmrtsmi3uw55-2007-1-23-16-19-33

  2. GAINS FROM TRADE

  3. GAINS FROM TRADESIMPLE COMPARATIVE ADVANTAGE

  4. WHY DO NATIONS TRADE?TOTAL NATIONAL WELFARE IS INCREASED THROUGH TRADING ACTIVITIES.

  5. COMPARATIVE ADVANTAGE.PRODUCE WHAT YOU PRODUCE WELL AND TRADE IT FOR THINGS YOU DO NOT PRODUCE WELL.

  6. THE CONCEPT OF COMPARATIVE ADVANTAGE DATES BACK TO A EARLY CLASSICAL ECONOMIST -- DAVID RICARDO

  7. COMPARATIVE ADVANTAGE HIGHLIGHTS THE PROPOSITION THAT RELATIVE PRODUCTIVITY IS MORE IMPORTANT THAN ABSOLUTE PRODUCTIVITY.

  8. The term is usually attributed to David Ricardowho explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries.

  9. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth.

  10. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good that it has comparative advantage in and trading that good for the other.

  11. COMPARATIVE ADVANTAGE DETERMINED BY FOUR FACTORS.

  12. COMPARATIVE ADVANTAGE DETERMINED BY FOUR FACTORS. NATURAL RESOURCE BASE

  13. COMPARATIVE ADVANTAGE DETERMINED BY FOUR FACTORS. NATURAL RESOURCE BASE LOCATION RELATIVE TO MARKETS

  14. COMPARATIVE ADVANTAGE DETERMINED BY FOUR FACTORS. NATURAL RESOURCE BASE LOCATION RELATIVE TO MARKETS PRODUCTION EFFICIENCIES (INPUT/OUTPUT)

  15. COMPARATIVE ADVANTAGE DETERMINED BY FOUR FACTORS. • NATURAL RESOURCE BASE • LOCATION RELATIVE TO MARKETS • PRODUCTION EFFICIENCIES (INPUT/OUTPUT) • TRADE POLICIES • TARIFFS - EXCHANGE RATES

  16. why trade takes place AUTARKY PRICE DEMAND SUPPLY QUANTITY

  17. MARKET A MARKET B P P

  18. MARKET A MARKET B P WORLD PRICE P

  19. MARKET A MARKET B P WORLD PRICE P IMPORT

  20. MARKET A MARKET B P WORLD PRICE P IMPORT EXPORT

  21. HERE WE ASSUME NO TRANSPORTATION COST MARKET A MARKET B P WORLD PRICE P IMPORT EXPORT

  22. MARKET A MARKET B WORLD PRICE P Transport Cost P IMPORT EXPORT

  23. SIMPLE TWO COUNTRY /TWO PRODUCT MODEL -- FRANCE AND THE U.S.A.

  24. PRODUCTION POSSIBILITIES US FRANCE BREAD WINE BREAD WINE 120 0 40 0 80 10 20 10 40 20 10 15 0 30 0 20

  25. PRODUCTION POSSIBILITIES BREAD 120 40 20 30 WINE

  26. PRODUCTION RATIOS (PRICE RATIOS)US 120/30 = 12/3 = 4/1FRANCE 40/20 =4/2 = 2/1

  27. PRODUCTION RATIOS (PRICE RATIOS)US 120/30 = 12/3 = 4/1 3/1FRANCE 40/20 =4/2 = 2/1

  28. A RATIO OF: 3 BREAD / 1 WINEBOTH COUNTRIES ARE BETTER OFF

  29. DO ALL SEGMENTS OF AN ECONOMY BENEFIT FROM FREE TRADE?

  30. DO ALL SEGMENTS OF AN ECONOMY BENEFIT FROM FREE TRADE? NO!

  31. MARKET A MARKET B WORLD PRICE P P IMPORT EXPORT

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