Chapter 9 - Comparative advantage, exchange rates, and globalization. After reading this chapter, you should be able to: Explain the principle of comparative advantage, explain why economists' and laypeople's views of trade differ, summarize the sources of . comparative advantage and discuss some concerns about the future in the . economy, discuss how exchange rates are determined and what their role is in equalizing trade flows. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Explain the principle of comparative advantage Discuss how exchange rates are determined and what their role is in equalizing trade flow Explain why economists’ and laypeople’s views of trade differ Summarize the sources of . comparative advantage and discuss some concerns about the future in the . economy 2 The Principle of Comparative Advantage Opportunity cost is what must be given up in one good in order to get another good The principle of comparative advantage is that as long as the relative opportunity costs of producing goods differ among countries, then there are potential gains from trade 3 Dividing Up the Gains from Trade The more competition, the less the trader gets Smaller countries get a larger proportion of the gain than larger countries Countries producing goods with economies of scale get a larger gain from trade Three determinants of the terms of trade are: 4 Why Economists and Laypeople Differ in Their Views of Trade The gains of trade, lower prices, are harder to see than the cost, lost jobs The public believes that lower wages in other countries give them the comparative advantage in everything, so we will lose all jobs If trade is good, why do so many people oppose it? Laypeople often think of trade as trade only in manufactured goods Laypeople are extremely concerned about the impact of trade on the distribution of income 5 Sources of . Comparative Advantage . physical and technological infrastructure is the best in the world Wealth from past production and borrowing allows the . to be the world’s largest consumer . companies and individuals hold a large number of intellectual property rights The . has a relative open immigration policy 6 Some Concerns about the Future Transferable comparative advantages are based on factors that can change relatively easily, such as capital, technology, and types of labor Whether a . | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter Goals Explain the principle of comparative advantage Discuss how exchange rates are determined and what their role is in equalizing trade flow Explain why economists’ and laypeople’s views of trade differ Summarize the sources of . comparative advantage and discuss some concerns about the future in the . economy 2 The Principle of Comparative Advantage Opportunity cost is what must be given up in one good in order to get another good The principle of comparative advantage is that as long as the relative opportunity costs of producing goods differ among countries, then there are potential gains from trade 3 Dividing Up the Gains from Trade The more competition, the less the trader gets Smaller countries get a larger proportion of the gain than larger countries Countries producing goods with economies of scale get a larger gain from trade Three determinants of the terms of trade are:
