Transcript Lecture19(Ch17)

Overview of the Field of
International Economics
• 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
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
17_01
INTERNATIONAL TRADE AS A
PERCENT OF WORLD GDP
25
20
15
10
5
0
1960s
1990s
Four ways to gain from trade
•
•
•
•
voluntary exchange (already discussed)
competition (already discussed)
economies of scale (next lecture)
comparative advantage (this lecture)
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
Numerical example:
Output per day of work
Vaccine
TV sets
US
6
3
K
1
2
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
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
To get a gut-feeling for the idea
of comparative advantage, let’s
imagine 2 people with 2 skills:
lawyer
economist
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
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
Determining the price ratio
before trade
• 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
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
Showing Comparative Advantage with
Production Possibilities Curves
(10,000 workers in US and 30,000 in K)
17_02
PHARMACEUTICAL GOODS
(THOUSANDS OF VIALS
OF VACCINE)
60
B
PHARMACEUTICAL GOODS
(THOUSANDS OF VIALS
OF VACCINE)
Production
possibilities curve
without trade
50
40
30
60
Production
possibilities curve
without trade
50
40
A
C
20
Production possibilities
curve with trade
10
F
30
D
20
Production possibilities
curve with trade
10
1015 20
30
40 50 60
ELECTRONIC GOODS
(THOUSANDS OF TV SETS)
United States
10
E
20 30 40 50 60
ELECTRONIC GOODS
(THOUSANDS OF TV SETS)
Korea
Do you think you could sketch
that diagram by hand?