The International Economy & Globalization
11 important questions on The International Economy & Globalization
Modern Trade Theory: Mercantilists Trading Principles
Modern Trade Theory: David Hume's price - speci - flow doctrine
Modern Trade Theory: Adam's Smith Principle of absolute advantage
- Use less labor to produce one unit of output.
- each nation must have a good that it is absolutely more efficient in producing in than its trading partner.
Thus:
- Import goods - if there is an absolute cost disadvantage.
- Export goods - If there is an absolute cost advantage.
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Modern Trade Theory: David Ricardo's Principle of Comparative Advantage
Emphasized comparative (relative) cost differences.
Even if a nation will specialize in and export the good in which it is relatively less inefficient, and where its absolute disadvantage is least.
The more efficient nation will specialize in and export that good in which it is relatively more efficient.
Assumptions principles of comparative advantage
- The world consists of 2 nations.
- Labor can move freely among industries.
- Technology - fixed for both nations.
- Costs do not vary with the level of production.
- Perfect competition prevails in all markets.
- Free trade occurs between nations.
- Transportation costs are zero.
- Firms make production decisions in an attempt to maximize profits.
- There is no money illusion.
- Trade is balanced.
Trading under constant -cost conditions
- The basis for trade: the principle of comparative advantage.
- The direction of Trade: specialize and export the good with the lowest opportunity cost.
- Production gains from specialization.
John Stuart Mill's equilibrium of Trade
- Add the intensity of the trading partners' demands.
- Determine the actual terms of trade.
- The theory of reciprocal demand
John Stuart Mill’s equilibrium terms of trade:
For two nations engaged in international trade
- Same size, similar taste patterns
- Gains from trade – shared equally between them
- One nation is significantly larger than the other
- Larger nation - fewer gains from trade
- Smaller nation - most of the gains from trade.
John Stuart Mill’s equilibrium terms of trade:
Improvement in a nation’s terms of trade
o Relative to its import prices.
· A smaller quantity of export goods sold abroad:
o Required to obtain a given quantity of imports.
· Deterioration in a nation’s terms of trade
o Rise in its import prices:
o Relative to its export prices
o Purchase of a given quantity of imports
o Sacrifice of a greater quantity of exports.
The Dynamic gains from International trade
- More efficient use of an economy’s resources
- Higher output and income
- More saving, More investment
- Higher rate of economic growth
- Higher productivity
- Economies of large-scale production
- Increased competition.
Patterns of comparative advantage change over time
- Productivity increases
- Production possibilities schedule changes
- More output can be produced - with the same amount of resources
- Producers - need to hone their skills to compete in more profitable areas.
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