Week 8 Trade

gains from trade

benefits that come from reallocation resources, goods, and services to better uses

absolute advantage

the ability to do a task using fewer resources. who can do the job the best/fastest?

comparative advantage

the ability to do a task at a lower opportunity cost

what does absolute advantage tell you

who is best at the task not who should do the task

opportunity cost formula

opportunity cost = give up/gain

what is the specialization point

the absolute advantage point for each

why is the ppf bowed out like that

resources for making good x are less suited for y

specialization

people should do the thing they have a comparative advantage in. this ensures each task is being done at the lowest opportunity cost.

what kind of trade generates economic surplus

when everyone who specializes in certain tasks trade, economic surplus is created

prediction markets

people buy and sell based on what they think will happen which helps predict the outcome

what does price signal potential suppliers

tells sellers something about the consumer’s marginal benefit (how much they value the good)

what does price signal potential buyers

how expensive it is for sellers to produce something (marginal cost)

a high price is an incentive for what

for sellers to produce more and new sellers may enter the market. however buyers will buy less because things are expensive and they may switch to cheaper alternatives.

a low price is an incentive for what

for sellers to produce less and sellers may exit the market. buyers will buy more and there will be more customers.

why do countries trade with each other

to get things they cannot produce as cheaply themselves

what drives international trade

comparative advantage

imports

to buy goods or services from foreign sellers

exports

to sell goods or services to foreign buyers

trade costs

extra costs of buying/selling products internationally instead of within your own country

what is the formula for whether you should import a good

foreign price + trade cost < domestic price

what is the formula for if you should export a good

foreign price - trade costs > domestic price

what do trade agreements do

eliminate extra tax/tariffs associated with trade so trade is on teh rise

what are abundant inputs determined by

they are determined by geography, climate, and natural resources

economies of scale

companies save money by making products in large quantities

specialized production lines

workers focus on specific tasks which makes production faster + efficient

bargaining power with mass production

buying in large amounts helps companies negotiate lower prices

world supply

the total amount of a product that sellers around the world are willing to sell

world demand

total quantity of a good demand by all buyers around the world

world price

price that a product sells for in the global market

autarky

closed economy (no international trade)

when importing where is p world

it is under p domestic

when do countries import

when the world price is cheaper than the domestic price

what are consequences of imports

consumer surplus increases and producer surplus decreases a lot because they cannot compete.

where is p world in export graph

it is above p domestic

what happens to cs and ps with exports

producer surplus increases and consumer surplus decreases

with exports is economic surplus on top or bottom

on top

with imports is economic surplus on top or bottom

bottom

arguments for national security concerns

we should produce certain goods ourselves so we don’t depend on others. other countries could stop selling vaccines, weapons, etc.

counterargument for national security concerns

as long as we’re not cut off from all countries, we will have a way of getting what we need.

dumping

foreign countries temporarily sell products at very low prices. the goal is to force competing businesses out of the market. then they raise prices.

what happens to consumer surplus with import tariffs

goods are more expensive so consumer surplus shrink a lotwh

what happens to producer surplus with import tariff

producer surplus increases a little

red tape

extra rules, paperwork, and requirements that make international trade harder and more expensive.

exchange rate manipulation

making currency cheaper so imports are reduced and exports are increased