INTERNATIONAL TRADE DAVID RICARDO ABSOLUTE ADVANTAGE COMPARATIVE ADVANTAGE. Name: Period. Opportunity Cost
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1 Name: Period INTERNATIONAL TRADE DAVID RICARDO ABSOLUTE ADVANTAGE Meet Jeremy Bentham. He was a scholar, philosopher, and economist. He was one of the early proponents of using monetary policy to maintain full employment. He is on display at the University College of London. COMPARATIVE ADVANTAGE Opportunity Cost
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3 Steps to Calculate Comparative Advantage Terms of Trade Country 1 Terms of Trade Country 2 Extreme possibilities Extreme possibilities 3. 1 of A = X of B 1 of A = X of B X of A = 1 of B X of A = 1 of B PRACTICAL EXAMPLES OF EVALUATING COMPARATIVE ADVANTAGE 1. Determine which nation has comparative advantage for the following commodities. On which product should each nation focus its production efforts? ENGLAND Terms of Trade PORTUGAL England has comparative advantage in. Portugal has comparative advantage in.
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5 2. Use the graph below to answer the questions that follow about comparative advantage. HAPPYLAND Terms of Trade UTOPIA 150-Hardware OR 1200 Software Happyland has absolute advantage in. Utopia has absolute advantage in. The opportunity cost of producing 1-unit of hardware in Happyland is. The opportunity cost of producing 1 unit of hardware in Utopia is. Happyland should specialize in the production of. Utopia should specialize in the production of. If production of both goods triples in Utopia, how would comparative advantage change?. Given the terms of trade on the international market, which nation(s), if any, would be willing to trade on the world market?. Rule of Thumb: If a nation has comparative advantage in a particular product, it should focus on production of that product.
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7 Exchange Rate Dollar Market Currencies
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9 Currency Depreciation Currency Appreciation **Currency ALWAYS flows to the healthier nation s economy!** Dollar Appreciation Dollar Depreciation Value of the Dollar Demand for the Dollar Supply of the Dollar Effects on International Trade Xn will, causing GDP to. Xn will, causing GDP to. Practice Questions: If Happyland experiences unanticipated inflation, what should happen to the value of Happyland s currency? What should happen to Happyland s Xn and GDP? Draw a correctly labeled currency market graph for Happyland and show the change caused by the inflation.
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11 Changes in Consumer Tastes Changes in Relative Income Change in Relative Prices The healthier nation s currency will be the one that appreciates! Changes in Interest Rates Why exchange currencies?
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13 Floating Exchange Rate Purchasing Power Parity Fixed Exchange Rate Why Dollarize? Dollarization Risks of Dollarization
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15 Remittances Balance of Payment Accounts Current Account Official Reserves Account Capital/Financial Account Exports = Imports = Components: 1. Components: Income. WIRP earned by abroad minus WIRP earned by in the U.S
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17 Tariffs are taxes on goods. Protective Tariffs Non-Tariff Trade Barriers (NTB s) are any other types of on trade that do not involve tariffs. Quotas Dumping Revenue Tariffs Government Subsidies Trade Surpluses exist when >. Red Tape/Excessive Government Regulations Trade Deficits exists when >. Domestic Regulations on Health, Safety, and Employment Debt Forgiveness Other Common NTB s:
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