International Trade
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Transcript of International Trade
In the example In the U.S.
Each ton of wheat costs one ton of coffee to produce Each ton of coffee costs one ton of wheat
But in Brazil Each ton of wheat costs two tons of coffee Each ton of coffee costs one-half ton of wheat
The U.S. has a comparative advantage in wheat
because wheat only cost us one ton of coffee to produce, but costs Brazil two tons of coffee
Brazil has a comparative advantage in coffee, because coffee only costs them one-half ton of
wheat, but costs us one ton of wheat
Gains from trade I If we produce wheat it costs us only
one ton of coffee But it would cost Brazil two tons of
coffee U.S. is the low-cost producer of wheat We benefit if we sell wheat to Brazil at
any price above one ton of coffee Brazil benefits as long as the cost is
less than two tons of coffee
Gains from trade II Brazil is the low-cost producer of coffee It costs them one-half ton of wheat for
every ton of coffee they produce It would cost us one ton of wheat to
grow a ton of coffee in the U.S. We benefit from trade as long as we pay
less than one ton of wheat Brazil benefits as long as we pay more
than one-half ton of wheat for every ton of coffee
Terms of Trade
Any price between 1W = 1C and 1W = 2C is possible
The textbook uses 1W = 1.5C (or 1C = .75W)