Transcript Document

International Economics
Mordecai E. Kreinin
Part I
International Trade Relations
Copyright ©2002 South-Western/Thomson Learning.
All rights reserved.
CHAPTER 2
Why Nations Trade
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Sources of International
Commodity Trade Data
 Standard International Trade Classification
(SITC)

Commodity Trade Statistics
 Main Economic Indicators
 U.S. Census Bureau report of exports and
imports
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United States Commodity Imports and
Exports as Related to Output
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Why Nations Trade
 The Principle of Comparative Advantage
 Comparative Opportunity Cost
 Absolute Advantage and Wage Rates
 Summary of Policy Implications
 Dynamic Gains from International Trade
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Important Concepts
 Comparative advantage
 Anti-inflationary trade
 Country “in isolation”
 Absolute advantage
 Terms of trade
 Industry ranking
 Demand consideration
 Static gains from trade
 Relative wage rates
 Dynamic gains from
trade
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Principle of Comparative Advantage
 Gains from Trade
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Maximized profits
Relative cost-price positions determined by comparative
advantage
Comparative Advantage, inverse of comparative cost
Absolute advantage
Resource or opportunity cost
Direction of trade
 Demand Considerations
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Supply conditions provide trade limits
Reciprocal demand determines exchange ratio
Terms of Trade (export price divided by import price)
Commodity gain ratio vs. utility ratio
Differentiated Products
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Additional Insights:
Why Complete Specialization?
 Constant costs not real world scenario
 Increasing cost situations force prices in
two trading countries to converge
 No trade inducement
 Prices can easily equalize before complete
specialization is reached
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FIGURE 2.1
Supply Curves of Wheat and Textiles Under
Constant Cost Conditions
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Comparative Opportunity Cost
 Who Exports What?

Necessary to measure joint productivity of all
factors (in monetary value).
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Unit production cost = aggregate resources
used in production of one output unit
 Limits to Mutually Beneficial Exchange
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FIGURE 2.2
Region of Mutually Beneficial Trade
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Additional Insights:
Limits to Sustainable Exchange Rates
 Exchange rate limits can be translated from
commodities to money by assigning to each
commodity the price it commands in producing
country
 More than two commodities
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Internal ranking—multi-industry care
Examples from U.S. Trade
 Iron and steel
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Autos
High Technology
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Absolute Advantage and Wage
Rates
 Absolute advantage determines relative wage
rates in each country.
 Relative wage rate must conform to comparative
advantage for mutually beneficial trade.
 Wage rate limits equal to and determined by
productivity ratios.
 Exchange rate and safe ratios
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Expressed in terms of currencies, comparative
advantage yields limits to sustainable exchange rate.
Expressed in terms of labor production costs, it yields
limits to wage ratio.
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Summary of Policy Implications
 Improved resource use efficiency, raised real income
 Comparative advantage ranking and exchange rate
determine trade
 Rank—distorting policies allocate resources inefficiently
and reduce income to community
 Gainers—industries in which the country has
comparative advantage
 Losers—industries in which the country has comparative
disadvantage
 Policy debates result from gainers vs. losers disputes
 Gains outweigh losses
 Inflation reduction
 Government helps losers adjust (financial assistance,
retraining)
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Dynamic Gains from International
Trade
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Static effects—reallocation of resources
Dynamic benefits—additional resources available
Higher income from more efficient use of resources
Increased savings, more resources available for
investment
 Technological spillover
 Increased size of national market
 Economies of scale and benefits to economy at large
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Competitive pressure on prices
Product improvement
Technological advancement
Increased labor pool
Infrastructure development
Inflation dampening
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Summary
 Comparative advantage determines trade
 Exchange ratio, determined by demand
 Mutual benefit of trade
 Ranking and limits to sustainable exchange rate
 Absolute advantage and wage rates
 Anti-inflationary
 Increased GDP
 Introduction of goods, inputs, technology
 Increased market size
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FIGURE 2.2A
International Trade Under Constant
Opportunity Costs
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FIGURE A2-1.1
Consumer Indifference Curve
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FIGURE A2-1.2
Consumer Indifference Map
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FIGURE A2-1.3
Constant Opportunity Cost
(In Millions of Units)
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FIGURE A2-1.4
Increasing Opportunity Cost
(In Millions of Units)
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FIGURE 2.2A1.5
Equilibrium in Isolation
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FIGURE 2.2A1.6
Equilibrium with Trade:
Different Transformation Curves
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FIGURE 2.2A1.7
Equilibrium with Trade:
Different Indifference Curves
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