1、Classical Theories of International TradeInternational EconomicsChapter 1Chapter 1 Classical Theories of International Traden1.1 Mercantilismn1.2 Trade Based on Absolute Advantage: Adam Smithn1.3 Trade Based on Comparative Advantage: David Ricardon1.4 Comparative Advantage and Opportunity Costn1.5 C
2、omparative Advantage with More Than Two Commodities and Countriesn1.6 Theory of Reciprocal Demandn1.7 Offer Curve and Terms of Trade1.1 MercantilismnThe mercantilists advocated government regulation of trade to promote a favorable trade balance. nIf a country could achieve a favorable trade balance,
3、 it would receive payments from the rest of the world in the form of gold and silver. Such revenues would contribute to an increase in spending and thus a rise in domestic output and employment. nCriticsuPossible only for short termuAssuming static world economy Chapter 1 Classical Theories of Inter
4、national Traden1.1 Mercantilismn1.2 Trade Based on Absolute Advantage: Adam Smithn1.3 Trade Based on Comparative Advantage: David Ricardon1.4 Comparative Advantage and Opportunity Costn1.5 Comparative Advantage with More Than Two Commodities and Countriesn1.6 Theory of Reciprocal Demandn1.7 Offer Cu
5、rve and Terms of Trade1.2 Trade Based on Absolute Advantage: Adam SmithnWith free trade, countries could concentrate their production on the goods they could produce most cheaply and enjoy all the consequent benefits from the labor division.uCost differences govern the international movement of good
6、s. The concept of cost is founded upon the labor theory of value. nTwo assumptions, within each country:uLabor is the only factor of production and is homogeneous (i.e. of one quality).uThe cost or price of a good depends exclusively upon the amount of labor required to produce it. 1.2 Trade Based o
7、n Absolute Advantage: Adam SmithnAn arithmetic example uThe U.S. has an absolute advantage in iPad production; its iPad workers productivity (output per worker hour) is higher than that of the U.K, which leads to lower costs (less labor required to produce a set of iPad). uIn like manner, the U.K ha
8、s an absolute advantage in cloth production.1.2 Trade Based on Absolute Advantage: Adam SmithA Case of Absolute AdvantageCountryOutput per Labor HouriPadClothU.K.U.S.5 sets15 sets20 yards10 yardsChapter 1 Classical Theories of International Traden1.1 Mercantilismn1.2 Trade Based on Absolute Advantag
9、e: Adam Smithn1.3 Trade Based on Comparative Advantage: David Ricardon1.4 Comparative Advantage and Opportunity Costn1.5 Comparative Advantage with More Than Two Commodities and Countriesn1.6 Theory of Reciprocal Demandn1.7 Offer Curve and Terms of Trade1.3 Trade Based on Comparative Advantage: Davi
10、d RicardonMutually beneficial trade can occur even when one country is absolutely more efficient in the production of all goods. uThe more efficient country should specialize in and export that good in which it is relatively more efficient (where its absolute advantage is bigger). uThe less efficien
11、t country should specialize in and export the good in which it is relatively less inefficient (where its absolute disadvantage is smaller). uAssumptions of a simplified model l There are only two countries with a fixed level of technology in the world;lEach country owns only one input labor, which i
12、s fixed endowed and homogenous and can move across industries but cannot flow across countries; l Each country produces two commodities;l Perfect competition and free trade prevail in markets.1.3 Trade Based on Comparative Advantage: David RicardonAn Example of Comparative AdvantageuThe U.S. labor h
13、as a 5-to-1 absolute advantage in the production of iPads. The U.S. labor also has a 3-to-1 absolute advantage in the production of cloth. The U.S. has a greater absolute advantage in producing iPads than in producing cloth. uChina has an absolute disadvantage in the production of iPads and cloth. H
14、owever, Chinas absolute disadvantage is smaller in producing cloth than in producing iPads. 1.3 Trade Based on Comparative Advantage: David RicardoA Case of Comparative AdvantageCountryOutput per labor houriPadsClothRelative costU.S.5 sets15 yards1 iPad=3 yards of clothChina1 set5 yards1 iPad=5 yard
15、s of clothnGains from Specialization and Trade with Comparative Advantage uAs the U.S. transfers 1 worker from cloth production to iPad production, its output of iPads increases by 5 and cloth production falls by 15 yards. uAs China transfers 3 workers from iPad production to cloth production, its c
16、loth production increases by 15 yards and iPad production falls by 3.uThe gain from production and trade is the increase in the world output that results from each country specializing in its production according to its comparative advantage. 1.3 Trade Based on Comparative Advantage: David RicardoTh
17、e Change in the World Output Resulting from SpecializationCountryChange in the production ofiPadsClothU.S.+5 sets-15 yardsChina-3 sets+15 yardsChange in the World Output+2 sets0nComparative Advantage in Money Terms uAt this wage rate, Chinas average cost in dollars of producing cloth is less than th
18、e U.S. average cost. With perfectly competitive markets, Chinas selling price of cloth is lower than its U.S. selling price, and China exports cloth to the U.S.uEven though China is not as efficient as the U.S. in the production of cloth, its lower wage rate in terms of dollars more than compensates
19、 for its inefficiency. 1.3 Trade Based on Comparative Advantage: David RicardoComparative Advantage in Money PricesCountry Labor InputHourly Wage RateiPad (sets)Cloth (yards)QuantityPriceQuantityPriceU.S.1$205$415$1.33China1$51$55$1Chapter 1 Classical Theories of International Traden1.1 Mercantilism
20、n1.2 Trade Based on Absolute Advantage: Adam Smithn1.3 Trade Based on Comparative Advantage: David Ricardon1.4 Comparative Advantage and Opportunity Costn1.5 Comparative Advantage with More Than Two Commodities and Countriesn1.6 Theory of Reciprocal Demandn1.7 Offer Curve and Terms of Trade1.4 Compa
21、rative Advantage and Opportunity CostuOpportunity CostlOpportunity cost is the quantity of one good that must be given up to release enough resources to produce one more unit of another good. lThe marginal rate of transformation (MRT) is the quantity of one good that it must abandon to produce each
22、additional unit of another good.nGains from Specialization and Trade with Opportunity Costs uBoth countries are better off when they specialize and trade .1.4 Comparative Advantage and Opportunity CostProduction and Consumption with and without TradeBased on an exchange ratio of 1 iPad=4 yards of cl
23、othItemCountryU.S.ChinaProduction at Full Employment100 iPads0 yard of cloth0 iPad300 yards of clothConsumption with Trade50 iPads200 yards of cloth50 iPads100 yards of clothDomestic Production and Consumption without Trade50 iPads150 yards of cloth40 iPads100 yards of clothGains from Specialization
24、 and Trade50 yards of cloth10 iPadsnProduction Possibilities Frontier and Constant Opportunity CostsuA production possibilities frontier (PPF) shows the different combinations of two goods that can be produced when all of a countrys factors of production are fully employed in their most efficient wa
25、y.uThe slope of PPF is referred to as the marginal rate of transformation (MRT), which shows the amount of one product a country must sacrifice to get one additional unit of the other product. uWithout specialization and trade, the U.S. and China can produce and consume at any point along their resp
26、ective production possibilities frontiers.1.4 Comparative Advantage and Opportunity Cost1.4 Comparative Advantage and Opportunity CostPPF for the U.S. and China at Full EmploymentU.S.ChinaNumbers of iPadsYards of ClothNumbers of iPadsYards of Cloth1000600903050508060401007090301506012020200501501025
27、04018003003021020240102700300lPoints below the PPF, say, Point B or B, represent possible production combinations that can be produced but are inefficient because there would be some unemployed resources. lPoints above the PPF, say, Point C or C, represent production combinations that are not possib
28、le for a country to produce with available resources and technology.1.4 Comparative Advantage and Opportunity Cost1.4 Comparative Advantage and Opportunity CostlWith each country specializing in the production of the good in which it has a comparative advantage, 10 more iPads and 50 more yards of cl
29、oth are produced in the world. lWith trade, the set of consumption points that a country can achieve is determined by the terms of trade the relative price of trading iPads for cloth, and vice versa. lBoth countries are better off by specializing and trade than they would be without trade.uChanges i
30、n the Gains from Specialization and Trade 1.4 Comparative Advantage and Opportunity CostProduction and Consumption with and without TradeBased on an exchange ratio of 1 iPad=3.5 yards of clothItemCountryU.S.ChinaProduction at Full Employment100 iPads0 yard of cloth0 iPad300 yards of clothConsumption
31、 with Trade50 iPads175 yards of cloth50 iPad125 yards of clothDomestic Production and Consumption without Trade50 iPads150 yards of cloth40 iPads100 yards of clothGains from Specialization and Trade0 iPad25 yards of cloth10 iPads25 yards of clothu As the international exchange ratio (terms of trade)
32、 changes from 1 iPad for 4 yards of cloth to 1 iPad for 3.5 yards of cloth, the trading possibilities curve moves for each country. Changes in the Terms of Trade for the U.S. and China 1.4 Comparative Advantage and Opportunity CostuDistribution of the Gains from Trade lChanges in a countrys terms of
33、 trade over time indicate whether a country can obtain more or less quantity of imports per unit of exports. A change in a countrys terms of trade may reflect a change in either international or domestic economic conditions. When the terms of trade change as a result of a change in domestic economic
34、 conditions, the effect on the countrys welfare is uncertain. 1.4 Comparative Advantage and Opportunity CostuComplete Specialization l Each country specializes completely in the production of the good in which it has a comparative advantage and imports the other good. lComplete specialization occurs
35、 because as production expands in the industry with a comparative advantage, the domestic cost of producing the product does not rise. Constant costs are assumed to prevail over the entire range of production. 1.4 Comparative Advantage and Opportunity CostlThe firms cost curves and the products supp
36、ly curves are horizontal. Supply Curves of a Good and the PPF 1.4 Comparative Advantage and Opportunity CostnTrade under Increasing Opportunity Costs uIncreasing Costs and the PPFThe PPF and Supply Curve under Increasing Cost Conditions1.4 Comparative Advantage and Opportunity CostuThe slope of the
37、PPF at any point is represented graphically by the slope of a tangent to that point. u A country has increasing opportunity costs. lthe tangent FG is steeper than DE.uTwo reasons:lthe factors of production used to produce the products are specialized in the production of a particular product.lthe pr
38、emise that all resources are identical in the sense that all workers and capital have the same productivity in the production of both commodities is unrealistic.1.4 Comparative Advantage and Opportunity CostuProduction and Consumption without Specialization and Trade lWithout specialization and trad
39、e, the U.S. and China can produce and consume at any point on their PPF. uProduction and Consumption with Specialization and Trade Specialization and Trade under Increasing Cost Conditions 1.4 Comparative Advantage and Opportunity CostTrade TriangleTrade TriangleuSpecializing in and exporting the go
40、od in which the country has a comparative advantage and trading for the other good enables both countries to become better off by consuming beyond their respective PPFs.uProduction under increasing cost conditions constitutes a mechanism that forces prices to converge and results in neither country
41、specializing completely in the production of the good in which it has a comparative advantage.u In the case of increasing costs, both countries continue to produce both goods after trade and it is called as partial specialization. 1.4 Comparative Advantage and Opportunity CostChapter 1 Classical The
42、ories of International Traden1.1 Mercantilismn1.2 Trade Based on Absolute Advantage: Adam Smithn1.3 Trade Based on Comparative Advantage: David Ricardon1.4 Comparative Advantage and Opportunity Costn1.5 Comparative Advantage with More Than Two Commodities and Countriesn1.6 Theory of Reciprocal Deman
43、dn1.7 Offer Curve and Terms of Trade1.5 Comparative Advantage with More Than Two Commodities and CountriesnComparative Advantage with More Than 2 CommoditiesuEach country will then have a comparative advantage in the commodities that it exports at the particular equilibrium exchange rate established
44、 .Commodity Prices in the U.S. and U.K.CommodityPrice in the U.S. ($)Price in the U.K. ()ABCDE246810643211.5 Comparative Advantage with More Than Two Commodities and CountrieslIf the exchange rate is 1=$2, the dollar prices of the commodities in the U.K. would be: lThe U.S. will export Commodities A
45、 and B to the U.K. and import Commodities D and E from the U.K., leaving Commodity C not traded.CommodityABCDEDollar price in the U.K1286421.5 Comparative Advantage with More Than Two Commodities and CountrieslIf the exchange rate becomes 1=$3. The dollar prices of the commodities in the U.K. would
46、be: l The U.S. will export Commodities A, B and C to the U.K. and import Commodities D and E from the U.K. CommodityABCDEDollar price in the U.K18129631.5 Comparative Advantage with More Than Two Commodities and CountrieslIf the exchange rate turns to be 1=$1, the dollar prices of the commodities in
47、 the U.K. would be:l The U.S. would export only Commodity A to the U.K. and import all other commodities, with the exception of Commodity B. CommodityABCDEDollar price in the U.K64321nComparative Advantage with More Than 2 Countries uGiven the equilibrium PW/PC=3 with trade, Countries A and B will e
48、xport wheat to Countries D and E in exchange for cloth. Country C will not engage in international trade in this case because its pre-trade PW/PC equals the equilibrium PW/PC with trade. uGiven a trade equilibrium PW/PC=4, Countries A, B and C will export wheat to Country E in exchange for cloth, an
49、d Country D will not engage in the international trade. uIf the equilibrium turns to be PW/PC=2 with trade, Country A will export wheat to all the other countries except Country B, in exchange for cloth. 1.5 Comparative Advantage with More Than Two Commodities and CountriesRanking of Countries in Te
50、rms of International PW/PCCountryABCDEPW/PC12345Chapter 1 Classical Theories of International Traden1.1 Mercantilismn1.2 Trade Based on Absolute Advantage: Adam Smithn1.3 Trade Based on Comparative Advantage: David Ricardon1.4 Comparative Advantage and Opportunity Costsn1.5 Comparative Advantage wit
