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Basis of international trade

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Peter Pundit, an economics reporter, states that the European Union (EU) is increasing its productivity very rapidly in all industries. He claims that this productivity advance is so rapid that output from the EU in these industries will soon exceed that of the United States and, as a result, the United States will no longer benefit from trade with the EU.

a. Do you think Peter Pundit is correct or not? If not, what do you think is the source of his mistake?

b. If the EU and the United States continue to trade, what do you think will characterize the goods that the EU exports to the United States and the goods that the United States exports to the EU?

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Solution Preview

a. Do you think Peter Pundit is correct or not? If not, what do you think is the source of his mistake?

No. Benefits from trade have little to do with absolute volume produced by each country. It is based instead on the relative cost of producing each good ...

Solution Summary

Whether international trade is affected by the absolute output of one of the nations.

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