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INTERNATIONAL ECONOMICS Why do countries trade? Economics – A Course Companion. Bleak & Dorton , 2007, p245-251. Oxford University Press. . http://isis.faces.ula.ve/COMPUTACION/EMVI/17/NAFTA.jpg . Accessed: 5 th Sep 09.
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Why do countries trade?
Economics – A Course Companion. Bleak & Dorton, 2007, p245-251. Oxford University Press.
http://isis.faces.ula.ve/COMPUTACION/EMVI/17/NAFTA.jpg. Accessed: 5th Sep 09
http://batr.org/sitebuildercontent/sitebuilderpictures/nafta.gif. Accessed: 5th Sep 09
http://s3.amazonaws.com/mmc-beta-production/assets/1161/mmp_NAFTA_0408_article.jpg Accessed: 5th Sep 09
Accessed: 4th September 2009
There are a number of gains from international
trade which include:
Singapore Case Study
Division of Labour
Moving down the “learning curve” –
The Long Run Average Cost Curve
A Reduction in Long Run Average Costs
The answer to these questions can be found in
the concepts of absolute and comparative
The above table shows the production outcomes where two countries, Australia and China, are using the same quantities of resources to produce lamb and cloth. It is clear from the table that Australia has absolute advantage in producing lamb and that China has an absolute advantage in the production of cloth. Australia should obviously specialize in the production of lamb and China should specialize in the production of cloth.
Australia would only produce lamb, and if it doubled its resources, then assuming constant returns to scale, total output from the resources would be 12 kilos. Total lamb production has increased from a combined country effort of 10 kilos to one country (Australia) managing to produce 12 kilos with specialization. In the same way, China with twice as many resources dedicated to cloth production and constant returns to scale would have a total output of 6 metres of cloth. Total production of cloth has increased from a combined country effort of only 5 metres to one country (China) managed to produce 6 metres. Total output of both goods has risen following specialization.
Reciprocal Absolute Advantage
advantage in the production of a good or
service, if it can produce it at a lower
opportunity cost than another country.
This table shows that France has an absolute advantage in the production of both goods. However, in terms of comparative advantage France has a comparative advantage in the production of wine and Poland has a comparative advantage in the production of cheese. This is because France only has to give up 4/3 kilo of cheese to produce a alitre of wine, whereas Poland has to give up 3 kilos of cheese to produce 1 litre of wine. Poland only has to give up ⅓ of a litre of wine to produce a kilo of cheese, whereas France has to give up a ¾ litre of wine.
The comparative advantage for the better producer is the good where the distance between the production possibilities is greatest shown by (a) in the diagram. The comparative advantage for the less efficient producer is in the good where the distance between the production possibilities is least, shown by (b) in the diagram. France has the comparative advantage in producing wine and Poland has the comparative advantage in producing cheese.
Short Response Questions
Explain the benefits that can be gained as a result of international trade (10 marks)
Using a diagram, explain the concept of comparative advantage (10 marks)