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International Trade. The Gains from Trade n The law of comparative advantage < specialisation as the basis for trade < absolute advantage < comparative.

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Presentation on theme: "International Trade. The Gains from Trade n The law of comparative advantage < specialisation as the basis for trade < absolute advantage < comparative."— Presentation transcript:

1 International Trade

2 The Gains from Trade n The law of comparative advantage < specialisation as the basis for trade < absolute advantage < comparative advantage < the gains from trade based on comparative advantage n The law of comparative advantage < specialisation as the basis for trade < absolute advantage < comparative advantage < the gains from trade based on comparative advantage

3 Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

4 Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

5 Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

6 Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

7 The Gains from Trade n The limits to specialisation and trade n The terms of trade < P X /P M n Other reasons for gains from trade < decreasing costs < differences in demand < increased competition < trade as an ‘engine of growth’ < non-economic advantages n The limits to specialisation and trade n The terms of trade <PX/PM<PX/PM n Other reasons for gains from trade < decreasing costs < differences in demand < increased competition < trade as an ‘engine of growth’ < non-economic advantages

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