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What is globalization?
Connecting one nation with other nations through political, cultural and economic cooperation
Three effects of globalization?
- 1. Economic development by increasing trade volume (thanks to FTAs)
- 2. Appreciation and better understanding of foreign culture (tourism)
- 3. Increase in foreign investment
How is economic development related to globalization?
What factors affect competitiveness under globalization?
- 1. Resource endowments (labor, capital, technology)
- 2. Economic policies (monetary and fiscal)
- 3. Trade policies (exchange rates, FTAs)
- 4. Domestic policies focusing on education and infrastructure.
Obama's policy to improve US competitiveness?
Education, infrastructure, renewable energy
Influences of global ag trade:
- growth and stability of world markets
- change in world population
- economic growth
Trade theory concerns
economic relations among nations
In early chapters, the US had an absolute advantage in terms of wine and bread. Why did France have a comparative advantage?
- Because the opportunity costs (in terms of bread) are lower for wine than in the US.
- In US, you'd have to give up 4 units of bread for every unit of wine. In France, you have to give up two units of bread for every unit of wine.
comparative advantage concept
relative productivity between countries is more important than absolute productivity in determining trade patterns
Why is specialization important to trade?
It allows us to have a comparative advantage because we have lower production costs compared to someone else
When trade changes, what happens to gains from trade?
the distribution of benefits change as well - that can cause problems
Social welfare =
Consumer surplus + producer surplus
Production choices are determined by
the economy's PPF and prices of output
The value of the economy's consumption is constrained how?
to equal the value of production
PbDb + PwDw = PbQb+PwQw = V
Marginal rate of substitution
Price of clothing divided by price of food
Consumer preferences are represented by
indifference curves (combinations by which consumers are equally happy)
A higher relative price for bread (v. wine) means what three things:
- 1. economy is better off exporting bread
- 2. higher bread prices mean more wine can be imported
- 3. consumers will buy less bread and more wine
The change in welfare (income) when the price of one good changes relative to the price of another is called-
- the income effect
- represented by moving to another indifference curve
Substitution is represented by
movement along a given indifference curve
Optimal level of input refers to that level of input which
- maximizes profits
- maximizing output not the same as maximizing inputs
- change in profit = change in rev - change in costs
Why use partial equilibrium analysis to view trade?
- Can see how specific sector of domestic and international economy impact each other
- Disadvantage - it's all other things equal, so you aren't getting substitutions, competitions
the difference between what a consumer is willing to pay for a good and what is acutally paid
difference between the price a producer actually receives and the minimum price they would accept
Terms of trade
- price of exports relative to the price of imports
- export bread and relative import price of wine increases, terms of trade improve
- improved tot = increased country welfare
Too-high disequilibrium prices are bad why?
Consumers want to consume more, but not at those high prices. The producer is gaining high prices at low production costs.
A too-low disequilibrium price (ceiling price) is bad how?
Producers aren't willing to produce as much as consumers want to buy.
A small country can be an exporter if it generates what at a world price?
Effective demand curve
- the sum of domestic demand curve and the international demand curve which is perfectly elastic at world price
- perfectly elastic - if price changes, consumers would switch to competitor's product. so price-takers.
- Buy low, sell high
- Ensures that shortly, there will be no price differences between trading countries
Equation for transportation costs?
P import - P export = transport