6.0. International Political Economy

1. 6.0. International Political Economy Learning Objectives: • Familiar with the subject matter of IPE • Understand the principle relationships between the economic realm and the political realm in an international context • Understand the theory of Comparative Advantage

2. 6.0. International Political Economy What is IPE? The Growth of IPE

3. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order

4. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order • Trade!

5. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order • The theory of absolute advantage

6. Absolute Advantage(two countries, two products, one production input (labour) • If Canada and India trade, both countries can divert labour to the good they produce most efficiently. For example: • Canada diverts 100 hours of labour from cloth production to wheat • India diverts 100 hours of labour from wheat production to cloth

7. Absolute Advantage(two countries, two products, one production input (labour) • Net gain from trade for Canada and India: 22 rolls of cloth and 6 bushels of wheat

8. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order • The theory of comparative advantage: the cornerstone of liberal economic theory and the basis of the world trading system!

9. Comparative Advantage(two countries, two products, one production input (labour) • Mexico has absolute advantage in cloth and wheat • Canada has comparative advantage in wheat • If Canada and Mexico trade, both countries can divert labour to the good they produce comparatively efficiently. For example: • Canada diverts 100 hours of labour from cloth production to wheat • India diverts 50 hours of labour from wheat production to cloth

10. Comparative Advantage(two countries, two products, one production input (labour) • Net gain from trade for Canada and Mexico: 6 rolls of cloth and 6 bushels of wheat

11. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order • System wide gains from trade

12. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order • Problems and challenges arising from trade

13. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the Liberal Economic Framework from Bretton Woods to the Washington Consensus Trade (mutually beneficial exchange) Comparative Advantage Rules and Institutions

14. Summary • At the end of this class, you should be able to describe the subject matter of IPE. • You should be familiar with the relationship between the economic realm and the political realm in an international context. • You should understand and be able to describe the theory of absolute advantage and the theory of comparative advantage. • You should be familiar with the central concepts of the Liberal economic framework.