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Welcome to EC 382: International

EconomicsBy: Dr. Jacqueline Khorassani

Study GuideWeek Two

(Note: You must go over these slides and complete every task outlined here before Wednesday, September 12)

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Chapter 2 continued (Make sure to send me your questions.)

• David Ricardo (1772(Netherlands)-1823)– What was his major contribution?– How is comparative advantage different from absolute

advantage?– Can a nation have comparative advantage but absolute

disadvantage in production of good “A”? If so, how? If not, why not?

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Production Possibilities Frontier

• What is it?• How does it look graphically?

– Slope • What does it measure?• How does it related to opportunity cost?• Under constant cost

– How does the related supply curve look and why?• Under increasing cost

– How does the related supply curve look and why?– What if we produce inside PPF?– Can we produce outside PPF?– Can PPF shift? If so, what causes it to shift?

• What is the difference between the production point and consumption point in the absence of trade?

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Comparative Advantage

• What is it?• How is it different from absolute

advantage?• Can a nation have both comparative and

absolute advantages? Give a numerical example.

• Can a nation have comparative advantage but not absolute advantage? Give an example.

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International Trade Under Constant Cost Assumption

• How is it based on the absolute advantage?– Who trades what?– Who specializes in production of what?– How is the terms of trade determined?– How does it affect the world production?– How does it affect the world consumption?– How does it affect each country’s production and

consumption?– How can we show the gains from trade in each

nation?

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International Trade Under Constant Cost Assumption

• How is it based on the comparative advantage?– Who trades what?– Who specializes in production of what?– How is the terms of trade determined?– How does it affect the world production?– How does it affect the world consumption?– How does it affect each country’s production and

consumption?– How can we show the gains from trade in each

nation?

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International Trade Under Increasing Cost Assumption

• What are the causes of increasing cost?• How does the PPF look?• How does the supply curve look?• Is complete specialization likely?• How is the terms of trade determined?• How does it affect the world production &

consumption?• How does it affect each country’s production

and consumption?• How can we show the gains from trade in each

nation?

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• How are the dynamic gains from trade different from the static gains from trade?

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Chapter 3: The Factor-Proportions Theory (Send me your questions.)

• What does the theory try to do?

• What are its assumption?

• What are its conclusions?

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The Factor-Proportions Theory

• What does the theory try to do?

• What are its assumption?

• What are its conclusions?

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Factor-Price Equalization

• What does the theory try to do?

• What are its assumption?

• What are its conclusions?

• What is the Stolper-Samuelson Theorem?

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The Specific-Factors Model

• What does the model try to do?

• What are its assumption?

• What are its conclusions?