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Transcript 
International
Trade
The Gains from Trade

The law of comparative advantage
 specialisation
 absolute
advantage
 comparative
 the
as the basis for trade
advantage
gains from trade based on comparative
advantage
Production possibilities for two countries
Kilos of
wheat
Metres of
cloth
Less developed country
Either
2
or
1
Developed country
Either
4
or
8
Pre-trade exchange ratios
Less developed country:
Developed country:
2 wheat for 1 cloth
1 wheat for 2 cloth
International trade exchange ratios
(LDC exports wheat: DC exports cloth)
Less developed country:
Developed country:
1 wheat for 1 cloth
1 wheat for 1 cloth
Production possibilities for two countries
Kilos of
wheat
Metres of
cloth
Less developed country
Either
2
or
1
Developed country
Either
4
or
8
Pre-trade exchange ratios
Less developed country:
Developed country:
2 wheat for 1 cloth
1 wheat for 2 cloth
International trade exchange ratios
(LDC exports wheat: DC exports cloth)
Less developed country:
Developed country:
1 wheat for 1 cloth
1 wheat for 1 cloth
Production possibilities for two countries
Kilos of
wheat
Metres of
cloth
Less developed country
Either
2
or
1
Developed country
Either
4
or
8
Pre-trade exchange ratios
Less developed country:
Developed country:
2 wheat for 1 cloth
1 wheat for 2 cloth
International trade exchange ratios
(LDC exports wheat: DC exports cloth)
Less developed country:
Developed country:
1 wheat for 1 cloth
1 wheat for 1 cloth
Production possibilities for two countries
Kilos of
wheat
Metres of
cloth
Less developed country
Either
2
or
1
Developed country
Either
4
or
8
Pre-trade exchange ratios
Less developed country:
Developed country:
2 wheat for 1 cloth
1 wheat for 2 cloth
International trade exchange ratios
(LDC exports wheat: DC exports cloth)
Less developed country:
Developed country:
1 wheat for 1 cloth
1 wheat for 1 cloth
The Gains from Trade

The limits to specialisation and trade

The terms of trade
 PX/PM

Other reasons for gains from trade
 decreasing
costs
 differences
in demand
 increased
 trade
competition
as an ‘engine of growth’
 non-economic
advantages
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