5-23 What Is New Trade Theory? First, many noneconomists believe that it is more advantageous to trade with other members of one’s nation or ethnic group than with outsiders. We see that trade between the two countries causes each country to specialize in the good in which it has a comparative advantage. Perhaps a friend across the table offered to trade her bag of grapes for your stack of crackers. The production possibilities curve for a second hypothetical country, Seaside, is given in Panel (b). Now suppose trade occurs, and the terms of trade are two washing machines for one computer. The opportunities created by trade will induce a greater degree of specialization in both countries, specialization that reflects comparative advantage. In spite of people's apprehension about trade, both imports and exports are at all-time highs (see the figure). Imagine for a moment how your household would fare if it had to produce every good or service it consumed. Surely agricultural goods represent an important comparative advantage for the United States. These developed countries also are the ones who seem to gain the most from international trade. The United States developed its comparative advantage in these services as the share of services in the U.S. economy grew over time. 9. This situation is suggested pictorially in Figure 17.4 “A Picture of Comparative Advantage in Roadway and Seaside”. Here, the terms of trade are one truck in exchange for one boat. Similarly, Seaside will specialize more in boat production. a resulting increase in total output possibilities. Figure 17.4 A Picture of Comparative Advantage in Roadway and Seaside. Seaside moves along its production possibilities curve to point B′, at which the slope equals −1. Though you were not asked to do this, the graphs demonstrate that it is possible that trade will result in both countries having more of both goods. producers; the price of shoes​ falls, the quantity of shoes they sell​ decreases, and producer surplus decreases. Seaside will produce more boats (and fewer trucks). International trade promotes efficiency in production as countries will try to adopt better methods of production to keep costs down in order to remain competitive. When an economy or individual can produce more of any good per unit of labor than another country or individual, that country or person is said to have an absolute advantage. If no trade occurs between the two countries, suppose that Roadway is at Point A and that Seaside is at Point A′. Seaside emerges from the opening of trade with 1,500 more boats and 750 more trucks than it had before trade. International trade allows countries to expand their markets and access goods and services that otherwise may not have been available domestically. As such, it's important to understand why economists believe trade is good. more goods than would be attainable through domestic production alone. These gains are, thus, of two types gain from exchange and gain from specialisation in production. Trade allows countries to consume combinations of goods and services they would be unable to produce. Moving down and to the right along its production possibilities curve, the opportunity cost of boat production increases; this is an application of the law of increasing opportunity cost. When trade began, factors of production shifted into boat production, in which Seaside had a comparative advantage. The graph shows the U.S. demand for and U.S. supply of shoes. At the point on its production possibilities curve at which it is operating, the opportunity cost of an additional washing machine in Beta is 3.5 computers. Seaside could produce only 5,000. A flight across the United States almost gives a birds-eye view of an apparent comparative advantage for the United States. Both produce only two goods, computers and washing machines. Production at point D implies that Roadway is failing to use its resources fully and efficiently; production at point E is unobtainable. At point A in Panel (a) of Figure 17.3 “Comparative Advantage in Roadway and Seaside”, one additional boat costs two trucks in Roadway; that is its opportunity cost. By specializing in the activity in which each individual has a comparative advantage, people are able to consume far more than they could produce themselves. It thus gives the opportunity cost of producing another unit of the good on the horizontal axis. Each country produces two goods, boats and trucks. Although all countries can increase their consumption through trade, not everyone in those countries will be happy with the result. International trade leads countries to specialize in goods and services in which they have a comparative advantage. Roadway’s production possibilities curve in Panel (a) is the same as the one in Figure 17.1 “Roadway’s Production Possibilities Curve” and Figure 17.2 “Measuring Opportunity Cost in Roadway”. Because Roadway is capable of producing more of both goods, we can infer that it has more resources or is able to use its labor and capital resources more productively than Seaside. A production possibilities curve illustrates the production choices available to an economy. Roadway thus emerges with 4,500 trucks (the 7,000 it produces at B minus the 2,500 it ships) and 9,500 boats. Beta? On the topic of international trade, the views of economists tend to differ from those of the general public. Then use the graphs below to answer the following questions. The law of increasing opportunity cost means that, as an economy moves along its production possibilities curve, the cost of additional units rises. What developed countries trade with each other look very There are many points along the tangent lines drawn at points R2 and S2 that are up to the right and therefore contain more of both goods. Alternatively, we can ask about the opportunity cost of an additional truck. Each household specializes in an activity in which it has a comparative advantage. Roadway’s truck producers will now get one boat per truck—a far better exchange than was available to them before trade. Full employment will be restored, which means both countries will be back at the same level of employment they had before trade. The production possibilities model suggests that the resources displaced will ultimately find more productive uses. As Roadway trades trucks for boats, its production remains at point B. An Emerging Consensus: Macroeconomics for the Twenty-First Century, 33.1 The Nature and Challenge of Economic Development, 33.2 Population Growth and Economic Development, Chapter 34: Socialist Economies in Transition, 34.1 The Theory and Practice of Socialism, 34.3 Economies in Transition: China and Russia, Appendix A.1: How to Construct and Interpret Graphs, Appendix A.2: Nonlinear Relationships and Graphs without Numbers, Appendix A.3: Using Graphs and Charts to Show Values of Variables, Appendix B: Extensions of the Aggregate Expenditures Model, Appendix B.2: The Aggregate Expenditures Model and Fiscal Policy. Figure 17.1 Roadway’s Production Possibilities Curve. Boat producers in Seaside enjoy a similar bonanza. Chapter 1: Economics: The Study of Choice, Chapter 2: Confronting Scarcity: Choices in Production, 2.3 Applications of the Production Possibilities Model, Chapter 4: Applications of Demand and Supply, 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings, Chapter 5: Elasticity: A Measure of Response, 5.2 Responsiveness of Demand to Other Factors, Chapter 6: Markets, Maximizers, and Efficiency, Chapter 7: The Analysis of Consumer Choice, 7.3 Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice, 8.1 Production Choices and Costs: The Short Run, 8.2 Production Choices and Costs: The Long Run, Chapter 9: Competitive Markets for Goods and Services, 9.2 Output Determination in the Short Run, Chapter 11: The World of Imperfect Competition, 11.1 Monopolistic Competition: Competition Among Many, 11.2 Oligopoly: Competition Among the Few, 11.3 Extensions of Imperfect Competition: Advertising and Price Discrimination, Chapter 12: Wages and Employment in Perfect Competition, Chapter 13: Interest Rates and the Markets for Capital and Natural Resources, Chapter 14: Imperfectly Competitive Markets for Factors of Production, 14.1 Price-Setting Buyers: The Case of Monopsony, Chapter 15: Public Finance and Public Choice, 15.1 The Role of Government in a Market Economy, Chapter 16: Antitrust Policy and Business Regulation, 16.1 Antitrust Laws and Their Interpretation, 16.2 Antitrust and Competitiveness in a Global Economy, 16.3 Regulation: Protecting People from the Market, Chapter 18: The Economics of the Environment, 18.1 Maximizing the Net Benefits of Pollution, Chapter 19: Inequality, Poverty, and Discrimination, Chapter 20: Macroeconomics: The Big Picture, 20.1 Growth of Real GDP and Business Cycles, Chapter 21: Measuring Total Output and Income, Chapter 22: Aggregate Demand and Aggregate Supply, 22.2 Aggregate Demand and Aggregate Supply: The Long Run and the Short Run, 22.3 Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium, 23.2 Growth and the Long-Run Aggregate Supply Curve, Chapter 24: The Nature and Creation of Money, 24.2 The Banking System and Money Creation, Chapter 25: Financial Markets and the Economy, 25.1 The Bond and Foreign Exchange Markets, 25.2 Demand, Supply, and Equilibrium in the Money Market, 26.1 Monetary Policy in the United States, 26.2 Problems and Controversies of Monetary Policy, 26.3 Monetary Policy and the Equation of Exchange, 27.2 The Use of Fiscal Policy to Stabilize the Economy, Chapter 28: Consumption and the Aggregate Expenditures Model, 28.1 Determining the Level of Consumption, 28.3 Aggregate Expenditures and Aggregate Demand, Chapter 29: Investment and Economic Activity, Chapter 30: Net Exports and International Finance, 30.1 The International Sector: An Introduction, 31.2 Explaining Inflation–Unemployment Relationships, 31.3 Inflation and Unemployment in the Long Run, Chapter 32: A Brief History of Macroeconomic Thought and Policy, 32.1 The Great Depression and Keynesian Economics, 32.2 Keynesian Economics in the 1960s and 1970s, 32.3. 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