Comparative advantage
as long as the relative opportunity costs of producing goods (what must be given up of one good in order to get another good) differ among countries, then there are potential gains from trade.
Layperson's concern is that the comparative advantage story do
Balance of trade
the difference between the value of exports and the value of imports.
Inherent comparative advantages
comparative advantages that are based on factors that are relatively unchangeable. (Resources or climate)
Transferable comparative advantages
comparative advantages based on factors that can change relatively easily. (Capital, technology, education)
trade deficit
Imports exceed exports
trade surplus
Exports exceed imports
exchange rates
the rate at which one country's currency can be traded for another country's currency.
currency depreciation
a change in the exchange rate so that one currency buys fewer units of a foreign currency.
currency appreciation
a change in the exchange rate so that one currency buys more units of a foreign currency.
Resource curse
the paradox that countries with an abundance of resources tend to have lower economic growth and more unemployment than countries with fewer natural resources. AKA Dutch Disease because of this phenomenon when Netherlands discovered offshore oil.
How gains from trade are divided (3)
1. The more competition that exists among traders, the less likely that it is that the trader gets big gains of trade; more of the gains from trade will go to the citizens in the two countries, and less will go to the traders.
2. Once competition prevails
Why Economists and Laypeople differ in their views of trade (4)
i. Gains are often stealth (i.e. decline in prices)
ii. Opportunity cost is relative. Every country should have comparative advantage in different goods. Comparative advantage model assumes balance of trade (exports = imports)
iii. Trade is broader than m
Sources of U.S. Comparative Advantage (10)
i. Skills of U.S. labor force.
ii. U.S. Government institutions.
iii. U.S. physical and technological infrastructure
iv. English is the international language of business
v. Wealth from past production.
vi. U.S. natural resources.
vii. Cachet. (entertainm
The law of one price
The wages of workers in one country will not differ significantly from the wages of (equal) workers in another institutionally similar country. Standard of living depends on whether or not comparative advantages are transferable or inherent. If not inhere
How the U.S. gained and is now losing comparative advantage (4)
i. U.S. doing its best from 1920s to 1940s because two world wars drive production to U.S.
ii. After WWII, exchange rates give the U.S. cost advantage (like China today)
iii. Trade balance temporarily maintained by U.S. companies investing in Europe and b
Equalizing trade balances
Wages in country b rise relative to country a, or country a exchange rate falls.
imports will be exactly offset by exports
World supply curve intersects domestic supply and demand at domestic equilibrium price
Country is running a trade deficit
World price is below domestic equilibrium