International Trade ECN 211: Dr. KUMAR

Why trade with other countries? Answer: Mutual Benefits/ Bigger profits! Economic theory suggests that countries should trade with one another if and only if both countries gain more by international trade than from domestic trade!

Four Basic Questions Why trade with other countries? Whom to trade with and what products to use to trade with ? Who or what decides the exchange process? What are the effects of trade on businesses, jobs and consumers?

How do we study “comparartive advantage” Answer: By making use of the Two by Two model derived from the theory

Two by Two Model Two countries only-U.S & China Two products only in each country-Computers and automobiles Full employment and Full Production in both Constant costs in both Closed/private economies in both

United States A 40 B Automobiles C D 12 F 28 40 Computers

China X 20 L Automobiles M Y 4 Z 8 10 Computers

Whom to trade with and what products to use... ? Answer: “Comparative advantage” Each country will attempt to export only those products which it can make more efficiently than other countries and import those which it cannot.

As a country the U. S. needs to export computers. Why As a country the U.S. needs to export computers! Why? Because of the production numbers listed below Production ratio 1 computer: 2 automobiles Production ratio 1 computer: 1 automobile United States

What are the effects of trade on businesses, jobs and consumers? Answer: Businesses and workers associated with the export industries benefit because of trade while companies facing import competition suffer. Customers in both the countries invariably benefit enormously. Overall, both countries and their economic systems also benefit.

United States A’ A 40 B Consumption Possibilities After trade Automobiles C D’ 18 12 D F 28 40 Computers

China X 20 L Consumption Possibilities After trade Automobiles M Y 4 Z 8 10 12 Z’ Computers