CU International Economics Tutor Marked Assignment Worksheet

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Course Development Team
Head of Programme
: Assoc Prof Huong Ha
Head, Business and
: Assoc Prof Chang Young Ho
Management Minors
Course Developer(s)
: Dr Tan Khay Boon
Technical Writer
: Diane Quek, ETP
Video Production
: Eric Lau, ETP
Instructional Designer
: Prasad Iyer, ETP
©
2020 Singapore University of Social Sciences. All rights reserved.
No part of this material may be reproduced in any form or by any means without
permission in writing from the Educational Technology & Production, Singapore
University of Social Sciences.
ISBN 978-981-4697-76-7
Educational Technology & Production
Singapore University of Social Sciences
463 Clementi Road
Singapore 599494
How to cite this Study Guide (APA):
Tan Khay Boon. (2020). ECO203 International economics (study guide). Singapore:
Singapore University of Social Sciences.
Release V2.9
Build S1.0.5, T1.5.21
Table of Contents
Table of Contents
Course Guide
1. Welcome…………………………………………………………………………………………………… CG-2
2. Course Description and Aims…………………………………………………………………. CG-3
3. Learning Outcomes…………………………………………………………………………………. CG-5
4. Learning Material……………………………………………………………………………………. CG-7
5. Assessment Overview……………………………………………………………………………… CG-9
6. Course Schedule…………………………………………………………………………………….. CG-12
7. Learning Mode………………………………………………………………………………………. CG-13
Study Unit 1: International Trade Theory
Overview……………………………………………………………………………………………………. SU1-2
Chapter 1: Absolute and Comparative Advantage…………………………………….. SU1-3
Chapter 2: The Standard Trade Model……………………………………………………… SU1-10
Chapter 3: Heckscher-Ohlin and Other Trade Theories……………………………. SU1-16
Summary………………………………………………………………………………………………….. SU1-22
Formative Assessment……………………………………………………………………………… SU1-23
References………………………………………………………………………………………………… SU1-38
Study Unit 2: International Trade Policy
Overview……………………………………………………………………………………………………. SU2-2
Chapter 4: Trade Restrictions: Tariff…………………………………………………………… SU2-4
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Table of Contents
Chapter 5: Non-tariff Barriers and Political Economy of Protection………….. SU2-11
Summary………………………………………………………………………………………………….. SU2-18
Formative Assessment……………………………………………………………………………… SU2-19
References………………………………………………………………………………………………… SU2-33
Study Unit 3: Economic Integration, International Trade and
Economic Development
Overview……………………………………………………………………………………………………. SU3-2
Chapter 6: Economic Integration………………………………………………………………… SU3-4
Chapter 7: Growth and Development with International Trade……………….. SU3-10
Summary………………………………………………………………………………………………….. SU3-17
Formative Assessment……………………………………………………………………………… SU3-18
References………………………………………………………………………………………………… SU3-33
Study Unit 4: The Balance of Payments, Foreign Exchange Markets
and Exchange Rate
Overview……………………………………………………………………………………………………. SU4-2
Chapter 8: Balance of Payments…………………………………………………………………. SU4-4
Chapter 9: The Foreign Exchange Market and Exchange Rates………………… SU4-10
Chapter 10: Exchange Rate Determination……………………………………………….. SU4-18
Summary………………………………………………………………………………………………….. SU4-24
Formative Assessment……………………………………………………………………………… SU4-25
References………………………………………………………………………………………………… SU4-39
ii
Table of Contents
Study Unit 5: Exchange Rate Adjustments and Macroeconomics
Policies
Overview……………………………………………………………………………………………………. SU5-2
Chapter 11: Exchange Rate Adjustment……………………………………………………… SU5-4
Chapter 12: Macroeconomics Policy with Exchange Rates……………………….. SU5-10
Summary………………………………………………………………………………………………….. SU5-16
Formative Assessment……………………………………………………………………………… SU5-17
References………………………………………………………………………………………………… SU5-30
Study Unit 6: Exchange Rate Systems and Financial Crisis
Overview……………………………………………………………………………………………………. SU6-2
Chapter 13: Exchange Rate Systems…………………………………………………………… SU6-4
Chapter 14: Financial Crisis and International Economic Problems………….. SU6-11
Summary………………………………………………………………………………………………….. SU6-17
Formative Assessment……………………………………………………………………………… SU6-18
References………………………………………………………………………………………………… SU6-30
iii
Table of Contents
iv
List of Lesson Recordings
List of Lesson Recordings
Absolute and Comparative Advantage…………………………………………………………… SU1-9
Standard Trade Model………………………………………………………………………………….. SU1-15
Heckscher-Ohlin and other Trade Theories…………………………………………………… SU1-21
Trade Restrictions – Tariff……………………………………………………………………………… SU2-10
Non-Tariff Trade Barriers………………………………………………………………………………. SU2-17
Economic Integration……………………………………………………………………………………… SU3-9
Growth and Development with International Trade…………………………………….. SU3-16
Balance of Payments………………………………………………………………………………………. SU4-9
Foreign Exchange Market and Exchange Rate………………………………………………. SU4-17
Exchange Rate Determination………………………………………………………………………. SU4-23
Exchange Rate Adjustments…………………………………………………………………………… SU5-9
Macroeconomics Policies with Exchange Rate………………………………………………. SU5-15
Exchange Rate Systems…………………………………………………………………………………. SU6-10
Financial Crisis and International Economic Problems…………………………………. SU6-16
v
List of Lesson Recordings
vi
Course
Guide
International Economics
ECO203
Course Guide
1. Welcome
Presenter: Dr Tan Khay Boon
This streaming video requires Internet connection. Access it via Wi-Fi to
avoid incurring data charges on your personal mobile plan.
Click here to watch the video. i
Welcome to the course ECO203 International Economics, a 5 credit unit (CU) course.
This Study Guide will be your personal learning resource to take you through the course
learning journey. The guide is divided into two main sections – the Course Guide and
Study Units.
The Course Guide describes the structure for the entire course and provides you with an
overview of the Study Units. It serves as a roadmap of the different learning components
within the course. This Course Guide contains important information regarding the
course learning outcomes, learning materials and resources, assessment breakdown and
additional course information.
i


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2. Course Description and Aims
This course provides you with theoretical and practical knowledge, and the analytical
skills necessary to analyse the key events that shape the international economics
environment. It will help you understand what influences trade pattern and exchange
rates, why protectionism and financial crisis occur and how trade and international
monetary policies can affect the income distribution and welfare of economies.
The six study units cover a wide range of topics from modern foundations of trade
theory, protectionism, economic integration, balance of payments, exchange rate systems
to financial crisis. At the end of this course, you will be able to make informed business
and investment decisions
Course Structure
This course is a 5-credit unit course presented over 6 weeks.
There are six Study Units in this course. The following provides an overview of each Study
Unit.
Study Unit 1 – International Trade Theory
This unit explains the theories of absolute and comparative advantage, examine the basis
for and the gains from trade with the standard trade model and analyse the theories
on international trade based on factor endowments, economies of scale and imperfect
competition
Study Unit 2 – International Trade Policy
This unit examines the effects of tariffs and other trade restrictions on an economy and
evaluates the justifications for trade restrictions
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Study Unit 3 – Economic Integration, International Trade and Economic
Development
This unit aims to explain the effects of economic integration and examine the relationship
between international trade and economic development
Study Unit 4 – The Balance of Payments, Foreign Exchange Markets and
Exchange Rates
This unit covers the measurement of the balance of payments, discuss foreign exchange
markets and their operations and examine exchange rate theories and exchange rate
determination
Study Unit 5 – Exchange Rate Adjustment and Macroeconomics Policies
This units examine the relationship between exchange rates, current account and national
income of economies and also analyse the effects of fiscal and monetary policies in open
economies
Study Unit 6 – Exchange Rate Systems and Financial Crisis
This unit compare the advantages and disadvantages of the flexible and the fixed
exchange rate systems, examines other exchange rate systems and analyse the causes and
impacts of financial crisis
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3. Learning Outcomes
Knowledge & Understanding (Theory Component)
By the end of this course, you should be able to:
• Demonstrate how comparative advantage determines trade patterns and the gains
from trade
• Determine the relationship between trade pattern, resource utilisation, factor prices
and income distribution among countries engaged in international trade
• Analyse the various methods used in trade restrictions and discuss the international
trade policies
• Summarises the reasons for trade restrictions and analyse the welfare effects of
trade restrictions
• Discuss the effects of economic integration
• Examine the growth and development with international trade
• Interpret the balance of payments
• Explain the determination of exchange rate
• Contrast the exchange rate adjustment with flexible and fixed exchange rate system
• Illustrate the effects of fiscal and monetary policies under the fixed exchange rate
system and the flexible exchange rate system
• Compare fixed and flexible exchange rate systems
• Inspect the cause of financial crisis
Key Skills (Practical Component)
By the end of this course, you should be able to:
• Develop the essential knowledge and interpersonal skills to work effectively in a
team
• Demonstrate well developed written proficiency
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• Show the importance and relevance of arguments in areas related to International
Economics through class or video presentations
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4. Learning Material
The following is a list of the required learning materials to complete this course.
Required Textbook(s)
Salvatore, D. (2012). Introduction to international economics (3rd ed.). Singapore: John
Wiley and Sons.
If you are enrolled into this course, you will be able to access the eTextbooks here:
To launch eTextbook, you need a VitalSource account which can be created via
Canvas (iBookStore), using your SUSS email address. Access to adopted eTextbook is
restricted by enrolment to this course.
Other recommended study material (Optional)
The following learning materials may be required to complete the learning activities:
Website(s):
http://www.imf.org
http://www.wto.org
http://www.oecd.org
http://www.worldbank.org
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5. Assessment Overview
The overall assessment weighting for this course for the Evening Cohort is as follows::
Assessment
Description
Weight Allocation
Pre-Course Quiz 1
2%
Pre-Class Quiz 1
2%
Pre-Class Quiz 2
2%
Assignment 2
Tutor-Marked Assignment
18%
Assignment 3
Group-based Assignment
20%
Class Participation
Participation during seminars
6%
ECA
End-of-Course Assessment
50%
Assignment 1
TOTAL
100%
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The overall assessment weighting for this course for the Day-time Cohort is as follows:
Assessment
Description
Weight Allocation
Pre-Course Quiz 1
2%
Pre-Course Quiz 2
2%
Pre-Course Quiz 3
2%
Assignment 2
Tutor-Marked Assignment
18%
Assignment 3
Group-based Assignment
20%
Class Participation
Participation during seminars
6%
ECA
End-of-Course Assessment
50%
Assignment 1
TOTAL
100%
The following section provides important information regarding Assessments.
Continuous Assessment:
In total, this continuous assessment will constitute 50 percent of overall student
assessment for this course. The sub-components are reflected in the table above
and are different for the day-time and evening cohort. The continuous assignments
are compulsory and are non-substitutable. It is imperative that you read through
your Assignment questions and submission instructions before embarking on your
Assignment.
End-of-Course Assessment:
The End-of-Course Assessment (ECA) will constitute the other 50 percent of overall
student assessment and will test the ability to analyse related concepts, theories and
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strategies to particular situations in international trade and finance. All topics covered
in the course outline may be included in the end-of-course assessment. There are
three components in the ECA. The first component consists of powerpoint slides for
presentation, the second component is a video recording of presentation and the third
component is a written report.
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6. Course Schedule
To help monitor your study progress, you should pay special attention to your
Course Schedule. It contains study unit related activities including Assignments, Selfassessments, and Examinations. Please refer to the Course Timetable in the Student Portal
for the updated Course Schedule.
Note: You should always make it a point to check the Student Portal for any
announcements and latest updates.
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Course Guide
7. Learning Mode
The learning process for this course is structured along the following lines of learning:
a.
Self-study guided by the study guide units. Independent study will require at
least 3 hours per week.
b.
Working on assignments, either individually or in groups.
c.
Classroom Seminar sessions (3 hours each session, 3 sessions in total).
iStudyGuide
You may be viewing the iStudyGuide version, which is the mobile version of the
Study Guide. The iStudyGuide is developed to enhance your learning experience with
interactive learning activities and engaging multimedia. Depending on the reader you are
using to view the iStudyGuide, you will be able to personalise your learning with digital
bookmarks, note-taking and highlight sections of the guide.
Interaction with Instructor and Fellow Students
Although flexible learning – learning at your own pace, space and time – is a hallmark
at SUSS, you are encouraged to engage your instructor and fellow students in online
discussion forums. Sharing of ideas through meaningful debates will help broaden your
learning and crystallise your thinking.
Academic Integrity
As a student of SUSS, it is expected that you adhere to the academic standards stipulated
in The Student Handbook, which contains important information regarding academic
policies, academic integrity and course administration. It is necessary that you read and
understand the information stipulated in the Student Handbook, prior to embarking on
the course.
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Study
Unit
International Trade Theory
1
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International Trade Theory
Overview
In this Study Unit, we will discuss and analyse international trade theories which aim
to explain why countries trade, and which country exports and imports what kind of
product.
Countries engage in international trade because they benefit from it. The benefits of trade
can be illustrated by the country having more to consume after trade or able to achieve a
higher welfare level after trade.
The benefits of trade arise from the productivity of resources that a country is endowed
with. Some countries are better at producing some products than the others due to their
resources endowment. Thus rather than producing everything by itself without trade, it
is better to focus on producing those products which it is able to produce productively,
sell these products and buy from other countries in which the products is not efficient to
produce. This is the basis of trade under the theory of absolute advantage and the theory
of comparative advantage in Chapter 1.
The theory of absolute advantage and the theory of comparative advantage are based on
the assumption of identical resources and constant opportunity cost which is unrealistic.
In real life, resources endowed by a country are not identical and hence the production
encounters an increasing opportunity cost. Mutually beneficial trade can still occur and
this will be is discussed under the Standard Trade Theory in Chapter 2.
The theory of absolute advantage, the theory of comparative advantage and the standard
trade theory did not explain why there is a difference in the productivity of resources.
This limitation is rectified in Chapter 3 when we explore Heckscher-Ohlin theory. The
Heckscher-Ohlin Theory explains the basis of comparative advantage on the factor
endowment of a country and the relative factor intensity of the products. The implication
on factor price equilisation and income distribution from the theory helps to analyse the
current international trade situations. Other bases of trade such as economies of scale,
product differentiation and technology are also analysed in this chapter.
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International Trade Theory
Chapter 1: Absolute and Comparative Advantage
Learning Outcomes
By the end of this Chapter, you should be able to:
1.
Explain and determine the absolute advantage and the comparative advantage
2.
Construct production possibility frontier with constant cost
3.
Illustrate gains from trade
1.1 Absolute Advantage
In this topic, we will define absolute advantage and learn how to determine which
economy has the absolute advantage and in which product.
1.1.1 Definition of Absolute Advantage
Absolute advantage is defined as the ability to produce more output using the same
resource or require less resource to produce the same output.
Consider two economies, the US and the UK. Both economies are endowed with labour
resource which can be used to produce wheat or cloth. In the US, one hour of labour can
produce six bushels of wheat or four yards of cloth. In the UK, one hour of labour can
produce one bushel of wheat or five yards of cloth. This is shown in Table 1.1 of Salvatore
(2012) on p.34.
Using the same resource (one hour of labour), the US can produce more bushels of wheat
than the UK. Thus the US has an absolute advantage in producing wheat. Similarly, the
UK can produce more cloth than the US with one hour of labour. Thus the UK has an
absolute advantage in producing cloth.
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1.1.2 Trade Pattern with Absolute Advantage
In the present international trade, each country should specialise in the production of a
product in which it has the absolute advantage, and export this product in exchange of
the product which it does not have the absolute advantage.
Assume that each economy has two hours of labour time. Initially, without trade (autarky
position), both economies produce and consume both products. Thus the US can consume
six bushels of wheat and four yards of cloth, while the UK can consume one bushel of
wheat and five yards of cloth.
With trade, the US can produce wheat and produces 12 bushels of wheat, while the UK
specialises in producing cloth and produces 10 yards of cloth. If the global price of one
bushel of wheat is one yard of cloth, then the UK can retain six6 yards of cloth, export four
yards of cloth to exchange for four bushels of wheat. In this case, the UK can consume
four bushels of wheat and six yards of cloth, while the US can consume eight bushels of
wheat and four yards of cloth. Both economies gain from trade.
1.2 Comparative Advantage
In this topic, we will define comparative advantage and learn how to determine which
economy has comparative advantage and in which product.
1.2.1 Definition of Comparative Advantage
Comparative advantage is defined as the ability to produce with lower opportunity cost.
Again consider the two economies, the US and the UK with labour resource to produce
wheat or cloth. In the US, one hour of labour can produce six bushels of wheat or four
yards of cloth. In the UK, one hour of labour can produce one bushel of wheat or two
yards of cloth. This is shown in Table 1.2 of Salvatore (2012), p36.
In the US, the opportunity cost of six bushels of wheat is four yards of cloth, or the
opportunity cost of one bushel of wheat is ? yard of cloth. In the UK, the opportunity cost
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International Trade Theory
of one bushel of wheat is two yards of cloth. Since the opportunity cost of one bushel of
wheat is lower in the US, the US has the comparative advantage in producing wheat.
In a similar context, in the US, the opportunity cost of one yard of cloth is 1½ bushel of
wheat in the US. In the UK, the opportunity cost of one yard of cloth is ½ bushel of wheat.
Thus the UK has a lower opportunity cost in producing cloth and has the comparative
advantage in producing cloth.
1.2.2 Trade Pattern with Comparative Advantage
Clearly, the US has the absolute advantage in producing both wheat and cloth. If trade
is based on absolute advantage, then there is no reason why the US would want to trade
with the UK.
But if trade is based on comparative advantage, then the US only has comparative
advantage in wheat while the UK still has the comparative advantage in cloth. Both
economies can still gain from the trade. As long as the world price is between both the
economies’ opportunity cost, mutually beneficial trade can occur for both economies.
The opportunity cost of one bushel of wheat is ? yard of cloth in the US and two yards of
cloth in the UK. If the world price of one bushel of wheat is one yard of cloth, then both
countries can gain if they specialise according to their comparative advantage, exporting
the product which has comparative advantage and import the product which has the
comparative disadvantage.
Internally, one bushel of wheat can only exchange for ? yard of cloth. If the US were to
export wheat, then one bushel of wheat can exchange for one yard of cloth in the global
market. Similarly, internally, the UK needs to give up two yards of cloth to exchange for
one bushel of wheat. If the UK were to export wheat, then it takes only one yard of cloth to
exchange for one bushel of wheat in the global international market. Thus both economies
gain from the trade.
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International Trade Theory
1.3 Gains from Trade with Constant Cost
In this topic, we will introduce the concept of production possibility frontier with constant
cost, and use the concept to illustrate the gains from trade.
1.3.1 Production Possibility Frontier with Constant Cost
The production possibility frontier is a curve that shows the maximum combination of two
products, X and Y, which an economy can produce when it fully utilises all its resources
at a given level of technological competence. Since resources of an economy are limited,
if more resources are being used to produce X, then there will be less resources for Y.
Thus an economy can only produce more of X by producing less of Y. The production
possibility curve is a downward slope. The amount of Y that the economy has to give up
to produce one unit of X is the opportunity cost of producing Y. This is the slope of the
production possibility frontier.
Assuming the resources in a country are identical and are used in a fixed proportion to
produce both X and Y, the opportunity cost of producing Y will be a constant and the
production possibility frontier is a straight line.
Refer to Table 2.4 of Salvatore (2012), p42, which shows the production possibility
schedules of the UK and the US in producing wheat and cloth. The US can use all
its resources to produce either 180 units of wheat or 120 units of cloth; while the UK
can produce either 60 units of wheat or 120 units of cloth with all its resources. Due
to differences in resources, both economies will have different production possibility
frontiers.
But within each economy, with identical resources used in fixed proportion in producing
wheat and cloth, the opportunity cost of wheat (in terms of the quantity of cloth that
needed to be forgone) is a constant. In the US, to produce one unit of wheat, it needs to
give up of ? units of cloth, regardless of the amount of wheat it has already produced. In
the UK, the opportunity cost of wheat is two units of cloth.
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With cloth on the Y axis and wheat on the X axis, the diagram for the production possibility
frontier for the US and the UK is shown in Figure 2.1 of Salvatore (2012), p43. Note that
the slope of the production possibility frontier for the US is ? and that of UK is two. If
the price equals the cost of production, the slope of the production possibility frontier can
also be expressed as the price of wheat relative to the price of cloth (PW/PC).
1.3.2 Gains from Trade
The maximum combinations of two products an economy can produce is called the
consumption possibility frontier. In autarky (without trade), an economy can only
consume what it produces. Thus the consumption possibility frontier is the same as the
production possibility frontier.
With trade, the consumption possibility frontier can be higher than the production
possibility frontier and this represents the gains from trade. However, mutual beneficial
gains can only occur if the global price is between the two economies’ opportunity cost.
That is, the global price of wheat must be between ? and two units of cloth. One example
is one unit of wheat trade for one unit of cloth.
Refer to Figure 2.2 of Salvatore (2012), p45. Without trade, both economies can only
consume at their production possibility frontiers. Assuming the US produces and
consumes 60 units of cloth and 90 units of wheat, the UK would produce and consume 40
units of cloth and 40 unit of wheat.
The US has comparative advantage in wheat and UK has comparative advantage in cloth.
With trade, the US will completely specialise in wheat and produce 180 units of wheat.
Likewise, the UK will completely specialise in cloth and produce 120 units of cloth. Under
the price of one unit of wheat in exchange for one unit of cloth, if the US exports 70 units
of wheat to exchange for 70 units of cloth from the UK, the US can gain 10 units of cloth
and 20 units of wheat; whereas the UK can gain 10 units of cloth and 30 units of wheat.
Note that in Figure 2.2 of Salvatore (2012), p45, the global price line has a slope of 1 which
is between the slopes of the UK and the US production possibility frontiers. With trade,
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the consumption possibility frontier is the global price line, which is higher than the
production possibility frontier. Thus both economies gain from trade.
Activity 1.1
Refer to Question 4 of the Review Questions of Salvatore (2012), p47. In Case A and
Case B, determine which economy has absolute advantage (if any) in which product.
Activity 1.2
Refer to Question 4 of the Review Questions of Salvatore (2012), p47. In Case A and
Case B, determine which economy has comparative advantage (if any) in which
product.
Activity 1.3
Consider Thailand and Malaysia; both produce cars and computers. Thailand can
produce two computers or one car using one unit of labour. Malaysia can produce
0.25 computer units or one car using one unit of labour. Thailand is endowed with 70
units of labour while Malaysia is endowed with 140 units of labour.
a.
Draw the production possibility frontier for both Thailand and Malaysia.
b.
If the pre-trade equilibrium is 80 computers and 30 cars for Thailand, and 20
computers and 60 cars for Malaysia, how does trade benefit both countries
if 50 computers can trade for 50 cars?
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Read
You should now read Salvatore (2012), Chapter 2.
Reflect 1.1
The US has more advanced level of technology compared to Singapore, especially
in the production of computer hardware and software. Yet it imports computer
peripherals from Singapore and export computer software. Why is it so?
Lesson Recording
Absolute and Comparative Advantage
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International Trade Theory
Chapter 2: The Standard Trade Model
Learning Outcomes
By the end of this Chapter, you should be able to:
1.
Construct production possibility frontier with increasing cost and community
indifference curve
2.
Explain equilibrium and illustrate gain from trade under increasing cost
3.
Explain terms of trade
2.1 Equilibrium without Trade
In this topic, we will learn how to construct production possibility frontier with the
increasing cost, discuss the pre-trade equilibrium, and the equilibrium after trade and
illustrate the gains from trade.
2.1.1 Production Possibility Frontier with Increasing Cost
The assumption of identical resources in an economy is not realistic. For example, workers
tend to have different educational level, skills, knowledge and ability such that some
workers may be better in producing one product than the other. This will give rise to
production with the increasing opportunity cost and the production possibility frontier
will be a concave curve instead of a straight line.
Refer to Figure 3.1 of Salvatore (2012), p55, which shows two economies, Nation 1 and
Nation 2, producing two products X and Y using non-identical resources. Initially, both
economies use all resources to produce Y only to have the maximum amount of Y. If
the economies wish to have some X, they will release the resources which are better at
producing X to the X product