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MB MC
International Trade
Frank
danteDante
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Introduction
• Understanding the Economic I...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Comparative Advantage
as a Basis for Trade
...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Production and Consumption Possibilities an...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Production Possibilities
Curve for a Many-W...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Production and Consumption Possibilities an...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Production and Consumption Possibilities an...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Production and Consumption Possibilities an...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Buying and Selling in World Markets
Chapter...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Buying and Selling in World Markets
Chapter...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Buying and Selling in World Markets
Chapter...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Production Possibilities, Consumption Possi...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Production Possibilities, Consumption Possi...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Straight-Line Production Possibilities Cu...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Two Consumption Possibilities Curves
Chapte...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Two Consumption Possibilities Curves
Chapte...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Consumption Possibilities With
and Without ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Consumption Possibilities With
and Without ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Production and Consumption Possibilities an...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Production and Consumption Possibilities an...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Production and Consumption Possibilities an...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
The Market for
Computers in Costa Rica
Chap...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
The Market for
Coffee in Costa Rica
Chapter...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Exercise 9.4
Chapter 9: International Trade...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
The Market for Computers after the
Impositi...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
The Market for Computers after the
Impositi...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Exercise 9.5
Chapter 9: International Trade...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Protectionist Policies: Tariffs
and Quotas
...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Protectionist Policies: Tariffs
and Quotas
...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
The Market for Computers after the
Impositi...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
The Market for Computers after the
Impositi...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
A Supply and Demand
Perspective on Trade
• ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Outsourcing
• Outsourcing
– A term increasi...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Outsourcing
• Outsourcing
– Outsourcing of ...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Outsourcing
• Economic Naturalist
– Paul So...
MB MC
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Outsourcing
• Characteristics of Jobs that ...
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Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Outsourcing
• Responding to changing econom...
MB MC
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Frank Dante explain 9 tips of International Trade

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Due to international trade, goods are produced not only for home utilization but for export to other countries also. Nations of the world can dispose of goods which they have in excess in the international markets

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Frank Dante explain 9 tips of International Trade

  1. 1. MB MC International Trade Frank danteDante
  2. 2. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Introduction • Understanding the Economic Issues of International Trade – The benefits of trade – The costs of trade – The economic impact of trade restrictions Chapter 9: International Trade Slide 2
  3. 3. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Comparative Advantage as a Basis for Trade • The principle of comparative advantage tells us that we can all enjoy more goods and services when each country produces according to its comparative advantage, and then trades with other countries. Chapter 9: International Trade Slide 3
  4. 4. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Production and Consumption Possibilities and the Benefits of Trade • Closed Economy – An economy that does not trade with the rest of the world • Open Economy – An economy that trades with other countries Chapter 9: International Trade Slide 4
  5. 5. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Production Possibilities Curve for a Many-Worker Economy Chapter 9: International Trade Slide 5 Computers (number/year) Coffee(pounds/year) B C A D Observations • The OC of producing an additional unit = the slope of the line that touches the point • OC will increase as output of on good increases 100,000 40,000 1,000 2,000
  6. 6. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Production and Consumption Possibilities and the Benefits of Trade • A country’s PPC shows the quantities of different goods that its economy can produce. • Consumption Possibilities – The combinations of goods and services that a country’s citizens might feasibly consume Chapter 9: International Trade Slide 6
  7. 7. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Production and Consumption Possibilities and the Benefits of Trade • In a closed economy: – Society’s production possibilities = consumption possibilities. – If a country is self-sufficient, it is called autarky. Chapter 9: International Trade Slide 7
  8. 8. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Production and Consumption Possibilities and the Benefits of Trade • In an open economy: – The society’s consumption possibilities are typically greater than its production possibilities. Chapter 9: International Trade Slide 8
  9. 9. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Buying and Selling in World Markets Chapter 9: International Trade Slide 9 Computers/year Coffee(pounds/year) B C A D Assume: • Producing at D • Closed economy • World price of coffee = $10/lb and computer = $500 120,000 100,000 1,000 50,000 2,000 2,400 150,000 3,000
  10. 10. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Buying and Selling in World Markets Chapter 9: International Trade Slide 10 Computers/year Coffee(pounds/year) B C A D F Observation: • Sell 2,000 computers @ $500 • Take the $1million and buy 100,000 pounds of coffee • Consumption possibilities of 150,000 is greater than PPC without trade E 150,000 120,000 100,000 1,000 50,000 2,000 2,400 3,000 Consumption possibilities Production possibilities
  11. 11. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Buying and Selling in World Markets Chapter 9: International Trade Slide 11 Computers/year Coffee(pounds/year) B C A D F Observation: • Start at D • Sell 50,000 lbs of coffee • Buy 1,000 computers with the $500,000 • Pt F is possible with trade but not on the PPC E 150,000 120,000 100,000 1,000 50,000 2,000 2,400 3,000 Consumption possibilities Production possibilities
  12. 12. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Production Possibilities, Consumption Possibilities, and the Optimal Production Mix for an Open Economy Chapter 9: International Trade Slide 12 Computers/year Coffee(pounds/year) B C A D F • 50 lbs of coffee trades for 1 computer • LM = consumption possibilities • G is the optimal combination for Costa Rica • Costa Rica can use trade to locate anywhere along LM E 150,000 120,000 100,000 1,000 50,000 2,000 2,400 3,000 Consumption possibilities Production possibilities 160,000 3,200 G M L
  13. 13. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Production Possibilities, Consumption Possibilities, and the Optimal Production Mix for an Open Economy Chapter 9: International Trade Slide 13 Computers/year Coffee(pounds/year) B C A D F Why produce at G? • Slope of the PPC = LM • Domestic and international opportunity costs of acquiring an extra computer (in terms of forgone coffee) are equal E 150,000 120,000 100,000 1,000 50,000 2,000 2,400 3,000 Consumption possibilities Production possibilities 160,000 3,200 G M L
  14. 14. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Straight-Line Production Possibilities Curve Chapter 9: International Trade Slide 14 Tea (pounds/year Coffee(pounds/year) B C A D Observation • The tradeoff between coffee and tea is constant at any point on the PPC 200 200 600 800 600 800
  15. 15. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Two Consumption Possibilities Curves Chapter 9: International Trade Slide 15 Tea (pounds/year Coffee(pounds/year) B C A D’ 600 200 600 800 800 1,600 D 200 • Islandia produces at A • Islandia can use the money earned from selling 800 lbs of coffee to choose any combination on AD’ Consumption possibilities curve when the world price of coffee is twice the world price of tea
  16. 16. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Two Consumption Possibilities Curves Chapter 9: International Trade Slide 16 Tea (pounds/year Coffee(pounds/year) B C A 600 200 600 800 800 1,600 D 200 • Islandia produces at D • Islandia can choose any combination on A’D Consumption possibilities curve when the world price of tea is twice the world price of coffee A’
  17. 17. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Consumption Possibilities With and Without International Trade • What Do You Think? – Where should Islandia produce if the price of coffee and tea were the same? Chapter 9: International Trade Slide 17
  18. 18. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Consumption Possibilities With and Without International Trade • Observations – With a bow-shaped PPC consumption possibilities is typically maximized by producing where the PPC is tangent to the consumption possibilities line. – With a straight-line PPC production is completely specialized. Chapter 9: International Trade Slide 18
  19. 19. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Production and Consumption Possibilities and the Benefits of Trade • Economic Naturalist – Does “cheap” foreign labor pose a danger to high- wage economies? Chapter 9: International Trade Slide 19
  20. 20. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Production and Consumption Possibilities and the Benefits of Trade • Economic Naturalist – Scenario • U.S. and Fredonia produce software and beef. • Real wages in Fredonia are lower than in the U.S. • Fredonia is half as productive as the U.S. in beef production. • Fredonia is one-tenth as productive in software production. Chapter 9: International Trade Slide 20
  21. 21. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Production and Consumption Possibilities and the Benefits of Trade • Economic Naturalist – Outcome • Fredonia has a comparative advantage in beef. • U.S. has a comparative advantage in software. • The U.S. will trade software for beef and increase its consumption of both. • Employment in the software industry in the U.S. increases and employment in the beef industry will decrease. Chapter 9: International Trade Slide 21
  22. 22. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Market for Computers in Costa Rica Chapter 9: International Trade Slide 22 Computer per year Without Trade Computer per year With Trade Domestic demand Domestic supply Consumer surplus with trade = $1.96mil/yr Producer surplus with trade = $360K/yr World price 2,000 4,800 E F 1,200 2,800 Computer Imports 2,000 4,800 2,400 1,400 400 Domestic demand Domestic supply Consumer surplus without trade = $1mil/yr Producer surplus without trade = $1mil/yr 2,400 1,400 400 1,000 E
  23. 23. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • If the price of a good or service in a closed economy is greater than the world price, and that economy opens itself to trade, the economy will tend to become a net importer of that good or service. Chapter 9: International Trade Slide 23
  24. 24. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Market for Coffee in Costa Rica Chapter 9: International Trade Slide 24 Coffee (pounds/year) Without Trade 100,000 240,000 12 7 4 Domestic demand Domestic supply Consumer surplus without trade = $250K/yr Producer surplus without trade = $150K/yr E Coffee (pounds/year) With Trade 100,000 12 7 4 Domestic demand Consumer surplus with trade = $40K/yr Producer surplus with trade = $600K/yr E Domestic supply World price F 40,000 200,000 240,000 Coffee exports 10
  25. 25. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • If the price of a good or service in a closed economy is lower than the world price, and that economy opens itself for trade, the economy will tend to become a net exporter of that good or service. Chapter 9: International Trade Slide 25
  26. 26. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • Observations of the Mutually Beneficial Gains from Trade – Countries will profit by exporting the goods and services for which they have a comparative advantage. – The revenue from the exports are used to import goods and services for which they do not have a comparative advantage. Chapter 9: International Trade Slide 26
  27. 27. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • Observations of the Mutually Beneficial Gains from Trade – The markets will ensure that goods will be produced where opportunity cost is lowest. – The consumption possibilities will be maximized. Chapter 9: International Trade Slide 27
  28. 28. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Exercise 9.4 Chapter 9: International Trade Slide 28 Computers per year Priceofcomputers($/computer) 200 Domestic supply World price Domestic demand 500 800 1,200 600 1,200 2,100 2,400 Question •Given the graph shown, what impact would trade have on producer and consumer surplus?
  29. 29. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • Winners and Losers from Trade – Winners • Consumers of imported goods • Producers of exported goods – Losers • Consumers of exported goods • Producers of imported goods Chapter 9: International Trade Slide 29
  30. 30. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • Protectionism – The view that free trade is injurious and should be restricted • Tariff – A tax imposed on an imported good • Quota – A legal limit on the quantity of a good that may be imported Chapter 9: International Trade Slide 30
  31. 31. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Market for Computers after the Imposition of an Import Tariff Chapter 9: International Trade Slide 31 Computers per year Priceofcomputers($/computer) 1,200 World price + tariff 1,600 2,400 1,000 1,200 Domestic supply World price Domestic demand 4,800 400 2,400 E 2,800 Imports without tariff
  32. 32. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Market for Computers after the Imposition of an Import Tariff Chapter 9: International Trade Slide 32 Computers per year Priceofcomputers($/computer) 1,200 Domestic supply World price Domestic demand 4,800 400 1,200 2,400 1,000 World price + tariff E 1,600 2,400 2,800 Imports with tariff Consumer surplus with tariff = 1.44K/yr Producer surplus with tariff = 640K/yr Tariff revenue = $160K/yr
  33. 33. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Exercise 9.5 Chapter 9: International Trade Slide 33 Computers per year Priceofcomputers($/computer) 200 Domestic supply World price Domestic demand 500 800 1,200 600 1,200 2,100 3,600 Question •Given the graph shown, how will a tariff of $300 per computer affect total economic surplus? 1,500 300 700
  34. 34. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Protectionist Policies: Tariffs and Quotas • What do you think? – Why did President George W. Bush support the imposition of tariffs on steel imported into the United States? Chapter 9: International Trade Slide 34
  35. 35. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Protectionist Policies: Tariffs and Quotas • Quotas – Legal limit on the number or value of foreign goods that can be imported – Can be enforced by issuing permits Chapter 9: International Trade Slide 35
  36. 36. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Market for Computers after the Imposition of an Import Quota Chapter 9: International Trade Slide 36 1,200 1,600 2,400 Domestic supply + quota F Computers per year Priceofcomputers($/computer) 1,200 2,800 Imports with free trade = 1,600 computers/yr 1,000 Domestic supply World price Domestic demand 4,800 2,400 E 1,400 2,000 400
  37. 37. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Market for Computers after the Imposition of an Import Quota Chapter 9: International Trade Slide 37 1,200 1,600 2,400 Domestic supply + quota F Computers per year Priceofcomputers($/computer) 1,200 2,800 Imports = 800 computers/year 1,000 Domestic supply World price Domestic demand 4,800 2,400 E 1,400 2,000 400 Economic rent to holders of import licenses = $80K/year Producer surplus with quota = $640K/yr Consumer surplus with quota = $1,440K/yr
  38. 38. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • Quotas & Tariffs – Market effects of tariffs are the same. – Tariffs generate tax revenue. – Quotas generate revenue for the firms that hold an import license. Chapter 9: International Trade Slide 38
  39. 39. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • Question – Why would the government ever impose a quota rather than a tariff? Chapter 9: International Trade Slide 39
  40. 40. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • Economic Naturalist – Who benefited from and who was hurt by voluntary export restraints on Japanese automobiles in the 1980s? Chapter 9: International Trade Slide 40
  41. 41. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • Other Barriers to Trade – Red-tape barriers – Regulations Chapter 9: International Trade Slide 41
  42. 42. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. A Supply and Demand Perspective on Trade • The Inefficiency of Protectionism – Trade barriers are inefficient and reduce the size of the economic pie. – Because trade barriers benefit certain groups, and these groups may be well organized, they may be successful in lobbying for trade barriers. – The gains from trade could be used to assist groups that have been hurt by trade. Chapter 9: International Trade Slide 42
  43. 43. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Outsourcing • Outsourcing – A term increasingly used to connote having services performed by low-wage workers overseas Chapter 9: International Trade Slide 43
  44. 44. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Outsourcing • Outsourcing – Outsourcing of services to low-wage foreign workers is exactly analogous to the importation of goods manufactured by low-wage foreign workers. Chapter 9: International Trade Slide 44
  45. 45. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Outsourcing • Economic Naturalist – Paul Solman and his associate Lee Koromvokis produce video segments that provide in-depth analysis of current economic issues for the PBS evening news program, The NewsHour with Jim Lehrer. – Is it likely that his job will someday be outsourced to a low-wage reporter from Hyderbad? Chapter 9: International Trade Slide 45
  46. 46. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Outsourcing • Characteristics of Jobs that are Less Susceptible to Outsourcing – Less rules-based jobs – “Face-to-Face” complex communication jobs – Jobs that require the worker to be physically present Chapter 9: International Trade Slide 46
  47. 47. MB MC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Outsourcing • Responding to changing economic conditions requires the ability to adapt quickly to new circumstances. • Education provides the means to develop a comparative advantage that is not rules- based and does require complex face-to-face communication. Chapter 9: International Trade Slide 47
  48. 48. MB MC End of Chapter

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