Why do Countries Trade? What Determines the Patterns of Trade?
Carbaugh, Chap. 2
2
Foundations of trade theory
Historical development of trade theory
Mercantilism
Carbaugh, Chap. 2 18
David Ricardo and Comparative Advantage
The U.S.A. Productivity: Yard of cloth per labor hour Bushels of wheat per labor hour Labor hours to make 1 yard of cloth 1 bushel of wheat 0.25 0.5 4.0 2.0 < < > > 1.0 0.67 1.0 1.5 The rest of the World
Carbaugh, Chap. 2 12
Adam Smith and Absolute Advantage
The benefits of free trade: Global production efficiency is enhanced because trade allows each country to exploit its absolute advantage in producing some products. Trade is a positive-sum activity.
Carbaugh, Chap. 2 9
Adam Smith and Absolute Advantage
Model: Two-Country & Two-product Two countries: the U.S.A. and the rest of the world Two products: wheat & clothes One Resource: Labor Assumption: The U.S.A is “better than” the rest of the world at producing wheat.
5
Prologue: Mercantilism
Carbaugh, Chap. 2
6
Prologue: Mercantilism
The central Belief of Mercantilism: National well-being or wealth was based on national holdings of gold and silver (specie or bullion), so exports were viewed as good and imports (except for raw materials not produced at home) were seem as bad. Mercantilism viewed trade as a zero-sum activity—one country’s gains come at the expense of some other countries.
Carbaugh, Chap. 2
17
David Ricardo and Comparative Advantage
Principle of Comparative advantage: A country will export products that it can produce at a low opportunity cost (in terms of other goods that could be produced within the country). A country will import products that it would otherwise produce at a high opportunity cost.
Carbaugh, Chap. 2
What products (if any) will the United States export or import? Can trade bring net national gains to both countries?
19
David Ricardo and Comparative Advantage
Carbaugh, Chap. 2
Adam Smith, 1723--1790
8
Adam Smith, Wealth of Nations, 1776
Adam Smith and Absolute Advantage
National well-being is based on the ability to consume products now and in the future. 国家福利应当是基于现在或者未来消费商品 的能力 Imports are part of the expanding national consumption that a nation seeks, not an evil to be suppressed.
International Economics
By Robert J. Carbaugh 9th Edition
Chapter 2: Foundations of Modern Trade Theory
Copyright ©2004, South-Western College Publishing
Carbaugh, Chap. 2
The rest of the World
0.25 0.5 4.0 2.0
< > > <
1.0 0.4 1.0 2.5
11
Adam Smith and Absolute Advantage
Without trade:
The U.S.A The price of Wheat The price of cloth 0.5 yard/Bushel 2.0 bushel/yard The rest of the World 2.5 yard/bushel 0.4 bushel/yard
Carbaugh, Chap. 2 7
Adam Smith and Absolute Advantage
If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the product of our own industry, employed in a way in which we have some advantage.
The relative price —the ratio of one product price to another product price
People will find a chance to make arbitrage (buying at the low price in one place and selling at the high price in the other place).
As same as Adam Smith, Ricardo also focused on labor productivity (or resource productivity more generally) for different products in different countries. Nevertheless, Ricardo developed the theory by introducing the concept of Carbaugh, Chap. 2 Opportunity Costs.
Without international trade:
The U.S.A The price o0.5 yard/Bushel 2.0 bushel/yard The rest of the World 1.5 yard/bushel 0.67 bushel/yard
Carbaugh, Chap. 2 14
Problems of Absolute Advantage Theory
USA Wheat Cloth 1 2 England 2 10
Carbaugh, Chap. 2
15
Episode II.
David Ricardo and Comparative Advantage
Carbaugh, Chap. 2
13
Adam Smith and Absolute Advantage
Problems of Absolute Advantage Theory: If a country with very low productivity efficiency has no absolute advantage, should she want to trade? If so, how?
Carbaugh, Chap. 2 10
Adam Smith and Absolute Advantage
The U.S.A. Productivity: Yard of cloth per labor hour Bushels of wheat per labor hour Labor hours to make 1 yard of cloth 1 bushel of wheat
Comparative Advantage
A country has a comparative advantage in producing a goods if the opportunity cost of producing that goods in terms of other goods is lower in that country than it is in other countries.