International Trade Chapter 05RW

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Chapter 5


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Extra credit opportunityExtra credit opportunity

Presentationson a countryor

a region(even a town/city in U.S.)

some other subject in global business

An especially good chance to discuss yourhomeor your ancestors home


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!ll try to schedule some as soon as peopleare ready" and continue through the term ! had allotted some time #or these the last two

sessions o# the term" but better to do them earlier

$ength %

& to ' minutes (individual)

Up to ' minutes (group)


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A country presentation can describe *he economic environment +ow do people live,

-hat is ! per capita

0rovide both unadjusted and purchasing power parity(000) adjusted statistics

+ow does ! per capita level a1ect li#e,

*he political environment +ow is the country/region governed,


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Something o# the cultural environment You cant summarizethe culture;just say one or two things that strikeyou as important

*he country or regions role in internationalbusiness -hat does the country or region produce,

+ow important is it to people elsewhere,

Can you tell what is li2ely to happen in the #uture,


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Free Tradeoccurs when a governmentdoes not attempt to in3uence" through

tari1s" 4uotas" or other means" what citiens can buy #rom other countriesor

produce and sell to other countries

*he Benefts o Trade allow countries tobe richer by specialiing in products theycan produce most e6ciently


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*he history o# government involvement intrade presents mi7ed evidence*here are lots o# problemswith trade*here may be some ways that some

governments can ma2e things better byintervening (that is" by not practicing #ree trade)

8ut government intervening in #ree trade is

de9nitely dangerous :estrictions on trade have kept some countries very poor contributed to huge depressions


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A nations wealth depends on accumulated;treasure< Gold and silver are the currency of trade

=ercantilists argued their countries shouldrun a trade surplus Maximize export through subsidies

Minimize importsthrough tariffs and quotas

>law? ;ero@sum game< Mercantilists neglected to see

the benefits of trade


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Adam Smith argued (Wealth ofNations" '&)? Capability of one country to

produce more of a product with the sameamount of input can vary A country should produce only goods where it is most

efficient, and trade for those goods where it is not efficient

*rade between countries is" there#ore"bene9cial Example Ghana!cocoa vs"

#outh $orea!rice


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As people specialie and seek higherincomes" they may learn to do their

specialties better


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Suppose one country is more e6cientthan another in everything,

*here are still global gains to bemade i# a country specialies inproducts it produces relatively

more eciently than otherproducts


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Bavid :icardo (Principles of PoliticalEconomy,'')?

A country should import products for which it is relativelyinefficient even if the country is more efficient in theproducts production than country from which it isbuying

*rade is a positive!sum game


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*heory o#Comparative Advantage


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Countries have comparative advantage in goods

#or which the opportunity costo# production isrelatively low*hat is" those that can be produced by giving up

relatively little in production o# other goods

*his means your country has comparativeadvantage in the product or service where theratio :esources re4uired in your country . :esources re4uired in the other country

is low


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Ghana has absolute advantage in both cocoa andrice, but its comparative advantage is in cocoa.Korea has comparative advantage in rice .Cocoa

Ghana

3.75

tons

Korea

15tons

20 tons

Let Korea specializein rice Ghana expandscocoa production to replaceall Korean cocoa productionlost

15tons

18

tons

Then Ghana can replace all Koreancocoa production and the countrieshave more of both goods.

Rice

10 tons

5 tons


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8ut it would be even poorer i# it did nottrade

The country less ecient inThe country less ecient in

everything "ill be poor #everything "ill be poor #


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*his is a very simple case" but the basicconclusions are generally valid

-ere assuming no transportation costs

-ere simpli#ying by not tal2ing aboutcurrencies

-ere assuming constant returns to scale

-ere assuming resources can move reely

#rom production o# one good to another

-ere not thin2ing about e1ects onincome distribution


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Under #ree trade" the country that is lesse6cient will have lo" "ages

!t will be able to sell the products where ithas comparative advantage "ithout anyspecial tari1 or subsidy protection 8ut it may need to wor2 on in#rastructure"

institutions #or trade China" !ndia both sell cheap manu#actured goods

China sells more because it has better transportationin#rastructure and government that supportsmanu#actured e7ports


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$mmobile resources% %esources do not always move easily from one

economic activity to another #o some rice farms will persist in Ghana no matter what

&Rice farmers will be losersas cheap rice comes from$orea'

&iminishing returns% (iminishing returns to specialization suggests that

after some point, the more units of a good thecountry produces, the greater the additionalresources required to produce an additional item


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*hey believed that i# people were le#t totrade on their own" they would naturallytrade the goods in which their countries had

comparative advantagevery individual see2s the most

advantageous employment #or his capital.

Study o# his own advantage necessarily leadshim to pre#er that employment most

advantageous to society@ Adam Smith' ())*


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>ree trade (open economies+% )ree trade might increase a country*s stoc+ of

resources &as labor and capital arrivesfrom abroad'

ncrease the efficiency of resource utilizationinsideeach country as well as between them


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*he U.S. seems to be good at inventing newproducts

*he important actors may be highlyspeciali,ed

So#tware design engineers

Dr the U.S. may have a uni4ue constellationo# #actors that produces new products

0roduction o# the new products tends to belabor intensive at 9rst*he U.S. imports older" heavy industrial products


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!n industries with high fxed costs? #pecialization increases output,

-he ability to achieve economies of scale increasesthrough exporting

.earning effects are high" -hese cost savings come from /learning by doing0


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!n many industries" world demand willsupport e"competitors

Success#ul 9rms may emerge because o#;>irst@mover advantage< Economies of scale may preclude new entrants

%ole of the government becomes significant

Some argue that it generates a need #orgovernment intervention andstrategic trade policy

Documents

International Trade Chapter 05RW