Application:
International Trade
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© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or dupliwebsite for classroom use.
The Determinants of Trade
World price
Price of a good that prevails in the world market for that good
Domestic price
Opportunity cost of the good on the domestic market
How much they must give up to one unit of the good
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© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Determinants of Trade
Compare domestic price with world price
Determine who has comparative advantage
If domestic price < world price
The country has comparative advantage
Export the good
If domestic price > world price
The world has comparative advantage
Import the good
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© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Winners and Losers From Trade
1) Exporting country
Domestic equilibrium price before trade is below the world price
Once trade is allowed
Domestic price rises to = world price
Domestic quantity supplied > domestic quantity demanded
The difference = exports
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© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 2
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© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
International Trade in
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