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International Economics:
Part 1: International Trade & FTA
Basis for…
International Economics:
Part 1: International Trade & FTA
Basis for International Trade:
Comparative Advantage
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Law of CA: Trade can benefit all countries is they specialize in goods in which they have CA in production
Assumptions
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Each country has 10 units of resources, devotes half to produce each good
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Perfect factor mobility within country, factor immobility between countries (hence need trade)
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Sources
of CA
International Differences in Factor Endowments
Climate and resource eg. arable land, skilled & unskilled labour, capital
Due to immobility of factors between countries
Lead to differences in relative P for factors and hence for goods
May change over time eg. capital accumulation, edu
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Dynamic CA
Changing pattern in CA
Establish policies to promote opportunities for change over time, eg.R&D
Limitations in Law of CA
Increasing OC
Expansion of industry drives up factor P or expand into less appropriate resources
Lose CA as country specializes further, complete specialization impossible
Transport Costs
Vast geographical distances, cheaper to produce domestically, may not trade
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Political & Strategic Reasons
Self-reliant during war, desire not to be overly dependent on insecure resources
Factor Immobility
Contract industries with no CA, expand those with CA
Factors cannot move efficiently into another use