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The Development of Trade Theory. Global Trade and Finance, Professor Bryson. Smith on Absolute Advantage, Ricardo on Comparative Advantage. What is the foundation of classical trade theory?
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The Development of Trade Theory Global Trade and Finance, Professor Bryson
Smith on Absolute Advantage, Ricardo on Comparative Advantage • What is the foundation of classical trade theory? • Absolute and comparative advantages relate basically to differences in the endowment of factor proportions enjoyed by different countries.
Smith on Absolute Advantage, Ricardo on Comparative Advantage • If a country has an abundance of labor, that country will have a comparative advantage in the production of labor-intensive goods.
Smith and Ricardo Adam Smith, An Inquiry into the Nature and Causes of The Wealth of Nations, 1776 David Ricardo, Principles of Political Economy and Taxation, 1817
Heckscher-Ohlin TheoremComparative advantages reflect factor endowments Bertil Ohlin 1899-1979 1977 Nobel Prize • Wrote between 1921 and 1949.
Heckscher-Ohlin TheoremComparative advantages reflect factor endowments ELI FILIP HECKSCHER Famous Swedish Economist Wrote on Mercantilism, Swedish History, and International Economics
Heckscher-Ohlin TheoremComparative advantages reflect factor endowments • "Countries export commodities produced through the intensive use of factors which they possess in abundance. Labor abundant countries export labor-intensive commodities and import capital-intensive commodities."
Leontief Paradox • Who was Leontief? • What was his paradox? • In tests run in the late 1940s, Leontief discovered that the US was actually exporting labor-intensive goods and importing capital-intensive goods. • Better tests were needed disaggregating, for example, skilled and unskilled labor.
Stolper-Samuelson Theorem • "When a country exports a commodity produced with intensive use of its abundant factor, that factor's returns will rise.“ • Factors producing commodities that must compete with low-cost imports will suffer declining returns as demand for the ill-favored product declines.
Modern (“Alternative) Trade Theory • Trade theorists originally conceived of a national economy and national markets. • But somewhere on the periphery of things, there were also some industries enjoying an international comparative advantage.
Modern (“Alternative) Trade Theory • That sector could produce world class commodities for a modest export sector. • This sector communicated and traded with buyers in other countries.
The Contemporary, Modern View • Now the national economy has gone far down the path of integration with other countries through trade markets. • There is no single, peripheral trade sector.
The Contemporary, Modern View • Trade sectors intermingle extensively with all the other sectors of the national economy. • Markets are not national, they are global.
Paul Krugman Krugman is one of the leading designers and proponents of the modern theory of trade. Also, he is a leading spokesman of the liberal wing of the profession. His credentials are impeccable. He Hates George Bush passionately.