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Industrial Organization Essay

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ECN 338: Midterm Exam Notes
KOM:
Chapter 1: Introduction
​Q: How is the US able to pay for all the excess imported goods?
A: The money is supplied by large inflows of capital, money invested by foreigners willing to take a stake in the US economy.
1. Gains from Trade
Benefits:
- trade provides benefits by allowing countries to export goods whose production makes relatively heavy use of resources that are locally abundant while importing goods whose production makes heavy use of resources that are locally scarce.
- Allows countries to specialize in producing a narrower range of goods, giving them greater efficiencies of large-scale production.
Disadvantages:
- Effects income distribution in such a way that owners of specific resources that compete with imports cannot find employment in other industries.
2. Pattern of Trade – who sells what to whom
- Climate and resources
- Relative supplies of national resources such as capital, labor, and land
3. How Much Trade?
- Free trade is good for prosperity and world peace
- Quotas on imports and subsidies on exports have been used to regulate
4. Balance of Payments
Q: Is it better to run a trade deficit or trade surplus?
A: Depends on an economic analysis of the given country
5. Exchange Rate Determination
- Values of currencies change over time
6. International policy Coordination
- One countries economic policies affect other countries
- Differences in country goals lead to conflicts of interest
7. International Capital Market
- Set of arrangements by which individuals and firms exchange money now for promises to pay back in the future
- Currency fluctuations: can cause a risk to the capital market such as if one countries currency falls the investor in that country would suffer capital loss
- National default: nation may refuse to pay its debts
Chapter 2: World Trade Overview
Gravity Model- helps to make sense of the value of trade between any pair of countries and also sheds light on the...

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