Why Counties Trade
（the classical model of internቤተ መጻሕፍቲ ባይዱtional trade）
Chapter Organization
• Introduction • Trade Based on Absolute Advantage • Trade Based on Comparative Advantage • Trade Based on Opportunity Costs • The Production Possibilities Frontier and Constant
• Video 3 video 2
3.Adam Smith’s theory of absolute advantage
• Adam Smith: The Wealth of Nations ,1776 • International trade is not a zero-sum game. • The gains from trade are the increase in world
• A favorable trade balance: a surplus of exports over imports.
• Mercantilist’s advocating: tariffs, quotas, and other trading protectionism policies.
2.The Mercantilism and its standpoints
• During 1500-1700,the doctrine of mercantilism dominated political and economic thought .
• The premise: a country can promote its self-interest by discouraging imports and encouraging exports ;a country wealth was precious metal, gold and silver
International Trade Versus Interregional Trade
• International trade and Interregional trade are similar. international means between two or more countries. Inter-regional (domestic trade) means between two or more regions, where a region is a part of a country. Benefits of Trade: -specialization and trade makes total world output of goods and services larger than it would be without trade
• Why do countries export and import certain goods?
• At what price are products exchanged in world market?
• What are the gains from international trade In terms of production and consumption?
• David Hume’s price-specie-flow doctrine: a favorable trade balance was possible only in the short run, for over time it would automatically be eliminated.
• Difference between international trade and interregional trade
• National currency; Trade policy; Market development; Culture and customs; law, etc
1.Three basic questions about international trade
output that results from each country specializing its produc-tion according to absolute advantage (absolute cost). • Absolute advantage is the ability of a country to use fewer resources to produce a good than other countries.
Costs • The Terms of Trade • Trade Under Increasing Opportunity Costs • Dynamic Gains from Trade
Introduction
• In this chapter, we first discuss international trade based on Adam Smith’s theory of absolute advantage. Then, we explain the pattern of trade and the gains from trade based on David Richard's theory of comparative advantage. We also explain the theory of comparative advantage in terms of opportunity cost. Finally, we describe the gains from trade that are difficult to quantify and occur over time.