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The Gains from

The Gains from. International. Trade. International Trade gains from trade comparative advantage trade barriers example: quotas. International Finance exchange rates trade deficits or surpluses a macro economic topic taken up in later lectures.

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The Gains from

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  1. The Gains from International Trade

  2. International Trade gains from trade comparative advantage trade barriers example: quotas International Finance exchange rates trade deficits or surpluses a macroeconomic topic taken up in later lectures Overview of the Field of International Economics

  3. Globalization of the Economy • Recent high growth of international trade • reduced transportation costs • lower barriers to trade • Look around you for many examples • today’s news • this computer

  4. Four ways to gain from trade • voluntary exchange (already discussed) • competition (already discussed) • economies of scale (next lecture) • comparative advantage (this lecture)

  5. Definitions • Absolute advantage: a country can produce a good relatively more efficiently than another country (example: U.S. better at oranges than Canada) • Comparative Advantage: a country can produce a good relatively more efficiently than another good in comparison with another country • Applies to people as well as to countries

  6. Numerical example: Output per day of work

  7. Find who has a comparative advantage in what • US has an absolute advantage over K in both vaccine and TV sets • for Vaccine 6>1, for TV sets 3>2 • US has a comparative advantage in vaccines • 6/1 is greater than 3/2 • K has a comparative advantage in TV sets • 2/3 is greater than 1/6

  8. Can define comparative advantage in terms of opportunity costs • Definition: If country A has a lower opportunity cost of producing a good, then it has a comparative advantage in that good compared to country B • Example. Opportunity cost of producing a TV in US is 2 vials while it is only 1/2 vial in Korea • Hence, Korea has the comparative advantage in TVs

  9. To get a gut-feeling for the idea of comparative advantage, let’s imagine 2 people with 2 skills: lawyereconomist

  10. Like two people, two countries can gain from trade based on comparative advantage. To see this, assume that the price with trade is 1 unit of vaccine for 1 TV set • How can the US gain from trade? • reduce TV production by 3 • increase vaccine production by 6 • trade with K for 6 TV sets • come out ahead by 3 TV sets

  11. Korea can also gain from trade • increase TV production by 6 • reduce vaccine production by 3, • trade with US for 6 vials of vaccine • come out ahead by 3 vials of vaccine

  12. United States in the US, 6 vials cost the same to produce as 3 TVs Thus, TVs should cost twice as much as vials ratio of PTV to P v = 2 Korea in Korea, 2 TVs cost the same to produce as 1 vial Thus TVs should cost half as much as vials ratio of PTV to P v = 1/2 Determining the price ratio before trade

  13. Determining the price ratio after trade • Price ratio must come together somewhere between 2 and 1/2 • We cannot tell exactly what the price ratio will be; • it depends on demand • For ease of multiplication, we therefore assume that the price ratio is 1 • that is, the ratio of PTV to P v = 1

  14. Showing Comparative Advantage with Production Possibilities Curves(10,000 workers in US and 30,000 in K)

  15. Do you think you could sketch that diagram by hand?

  16. End of Lecture

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