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Sem 5 Prep
← Intl TradeMercantilism and absolute advantage

Formulas for this chapter

Labour hours to produce a quantity

Hours = quantity required / output per labour hour

The base calculation for every gains-from-trade question in this chapter. Always use the productivity of the country you are standing in.

Quantity required
Units of the good to be produced or obtained
Output per labour hour
That country's productivity in that good

Labour-time saving from trade

Saving = (imports / own productivity in the imported good) - (exports / own productivity in the exported good)

When a question states an exchange and asks whether, or by how much, a nation gains. A positive answer for both nations proves the trade is mutually beneficial.

Imports
Quantity of the good received
Exports
Quantity of the good given up
Own productivity
Always the productivity of the nation whose saving you are computing
Step 2 of 20
The real wordsTheory

The three questions

Every trade theory in this course is answering the same three questions. The deck lists them in this order and so should you.

  1. What is the basis for trade?
  2. What are the gains from trade?
  3. What is the pattern of trade?

Basis is why trade happens at all. Gains is who is better off. Pattern is who exports what.

Throughout, assume a two-nation, two-good world. That assumption is doing a lot of work and is worth naming in an answer.

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