Lec 1: Introduction. Copyright 2000, South-Western College Publishing

Transcription

1 Lec 1: Introduction Copyright 2, South-Western College Publishing

2 Subject Outline Trade Theory Finance International Economics Trade Policy

3 Heckscher-Ohlin Stolper-Samuelson Comparative Advantage Factor Price Equalisation Absolute Advantage Trade Theory Study Guide 1 Rybzcynski Mercantilism Immiserising Growth

4 Trade Theory Theory used to explain and predict. What is International Trade? Why do nations trade? What are the gains from trade? Who gains from trade?

5 Other Trade Policies Regional Trade Agreements Tariffs Trade Policy Tools of the Trade Policy Analysis International Resource Movements

6 Current Account Deficit Exchange Rates Finance Study Guide 3 Weeks 9-12 Interest Arbitrage Exchange rate theorems

7 Heckscher-Ohlin Stolper-Samuelson Comparative Advantage Factor Price Equalisation Absolute Advantage Week 1 Mercantilism Trade Trade Theory Theory Study Guide 1 Rybzcynski Immiserising Growth

8 Trade Theory Why do Nations Trade? Mercantilism - zero sum game - one nation gains at the expense of the other. Adam Smith - both nations can gain from trade. Absolute Advantage - each nation should specialise in production of the good which it is most efficient at producing.

9 Trade Theory Why do Nations Trade? Perfect Competition in Product and Factor Markets (P=MC) Each Country has a fixed endowment of resources that are fully used and are homogeneous Technology is Unchanging No Transportation Costs or barriers to trade Factors of Production are perfectly mobile between industries but are immobile between countries 2x2x1 Assumptions

10 Trade Theory Why do Nations Trade? Mercantilism Thomas Munn ( ) The way for a nation to become rich and powerful is to export more than to import

11 Trade Theory Why do Nations Trade? Mercantilism ENGLAND FRANCE Imports Imports Exports Exports

12 Introduction Adam Smith ( )

13 Introduction David Ricardo ( )

14 International Economics By Robert J. Carbaugh 7th Edition Chapter 2: Foundations of modern trade theory Copyright 2, South-Western College Publishing

15 Foundations of trade theory Historical development of trade theory Mercantilism positive trade balance Absolute advantage (Adam Smith) Countries benefit from exporting what they make cheaper than anyone else Comparative advantage (David Ricardo) Nations can gain from specialization, even if they lack an absolute advantage Carbaugh, Chap. 2 15

16 International Trade Theories: Mercantilism (15 175): 1. International trade is a zero-sum game: Static view of world resources: One s gains = Other s losses 2. Wealth: Acquisition of precious metals gold or silver Well-being = Accumulating gold 3. Economic growth =Enhancement of power with strong army, strong navy and merchant marine, and enlargement of foreign colonies.

17 4. Productive = maintaining and increasing the power 5. Regulations or restrictions on importable activities 6. Favorable positive trade balance: Exports > Imports Inflows of specie (gold) Money supply increases Stimulates output and employment Economic growth

18 Mercantilism : Role of the government and domestic economic policy Control the use and exchange of precious metals (Bullionism) High tariffs, quotas on imports of consumption goods Tax exemptions and subsidies to exports Allows trade monopolies and monopsonies Pursues low wage policies Encourage large family, providing financial incentives for marriage and stimulate population growth Emphasis the important of the merchant class

19 David Hume (1752): Price-Specie-Flow Mechanism Accumulate specie with internal automatic repercussions. Assumptions: 1. Link between money and price: MV = PV; Full employment; Fixed velocity of money 2. Demand for trade goods is price elastic: Stable equilibrium in trade sector. 3. Perfect competition: product and factor markets Link between prices and wages (W). 4. Gold standard exists: Gold is directly linked to money and specie.

20 Price-Specie-flow Mechanism: Trade surplus vis-à-vis Trade Deficit Country A Country B Exports > Imports Exports < Imports Step 1 : Net inflow of specie Net outflow of specie Step 2 : Money supply increase Money supply decrease Step 3 : Step 4 : Prices and wages increase Increase in imports & Decrease in exports until Exports = Imports Prices and wages decrease Decrease in imports and Increase in exports until Exports = Imports

21 Adam Smith ( ) Laissez faire and free trade is a positive-sum game: Nation s wealth production capacity not holdings of gold Economic growth free environment and self-interest and competition Productivity gains division of labor and specialization of labor Mutual beneficial exchange and free trade

22 2 Foundations of modern trade theory Copyright 2, South-Western College Publishing

23 Foundations of trade theory Historical development of trade theory Mercantilism positive trade balance Absolute advantage (Adam Smith) Countries benefit from exporting what they make cheaper than anyone else Comparative advantage (David Ricardo) Nations can gain from specialization, even if they lack an absolute advantage Carbaugh, Chap. 2 23

24 Comparative advantage Absolute & Comparative Advantage Absolute advantage: each nation is more efficient in producing one good Output per labor hour Nation Wine Cloth United States 5 bottles 2 yards United Kingdom 15 bottles 8 yards Comparative advantage: the US has an absolute advantage in both goods Output per labor hour Nation Wine Cloth United States United Kingdom 4 bottles 4 yards 2 bottles 1 yards Carbaugh, Chap. 2 24

25 Comparative advantage Ricardo s Comparative Advantage in money prices Cloth (yards) Wine (bottles) Nation Labor Wage Quant. Price Quant. Price US 1 hr $2/hr 4 $.5 4 $.5 UK 1 hr 5/hr UK 1 hr $8 1 $.8 2 $.4 (at $1.6 = 1) Carbaugh, Chap. 2 25

26 Comparative advantage Transformation schedules Generalizes theory to include all factors, not just labor Shows combinations of products that can be made if all factors are used efficiently Slope, or marginal rate of transformation, shows the opportunity cost of making more of one good (how much of one good must be given up to make more of another) Carbaugh, Chap. 2 26

27 Wheat Comparative advantage Marginal Rate of Transformation A B Slope = MRT = Autos C Carbaugh, Chap. 2 27

28 Wheat Wheat Comparative advantage Transformation schedules: constant opportunity costs United States Canada Slope = 2. = MRT 8 6 Slope =.5 = MRT Autos Autos Carbaugh, Chap. 2 28

29 Bushels of wheat per auto Autos per bushel of wheat Comparative advantage Supply schedules: constant opportunity costs S Canada S US S US S Canada Autos Wheat Carbaugh, Chap. 2 29

30 Wheat Wheat Comparative advantage Trading under constant opportunity costs United States E A Trading possibilities line (terms of trade 1:1) C D Autos F 12 B Canada Carbaugh, Chap D B A Trading possibilities line (terms of trade 1:1) C Autos

31 Comparative advantage Production gains from specialization: constant opportunity costs Before After Net Gain Specialization Specialization (Loss) Autos Wheat Autos Wheat Autos Wheat US Canada World Carbaugh, Chap. 2 31

32 Comparative advantage Consumption gains from trade: constant opportunity costs Before After Net Gain Specialization Specialization (Loss) Autos Wheat Autos Wheat Autos Wheat US Canada World Carbaugh, Chap. 2 32

33 Bushels of wheat per auto Autos per bushel of wheat Comparative advantage Complete specialization under constant opportunity costs Aa S Canada Aw S US Aa S US Aw S Canada Autos Wheat Carbaugh, Chap. 2 33

34 Autos Autos Comparative advantage Changing comparative advantage United States Japan 1 MRT =.67 8 MRT =.5 MRT = MRT = Computers Computers Carbaugh, Chap. 2 34