Upload
charity-marshall
View
217
Download
1
Embed Size (px)
Citation preview
Introduction to the International Political Economy
Frederick University
2013
The subject of IPE
IPE is concerned with the ways in which political forces (states, institutions, individuals) shape the systems through which economic interactions are expressed, and the effects that economic interactions have upon political structures and outcomes.
The scope of IPE
International trade policies International finance International economic integration The process and problems of
globalization
The main economic problems and the international trade theory
Main economic problems:
Efficiency in allocation
Efficiency in motivation
Efficiency in distribution
How international trade flows contribute to:
efficiency in allocation,
in motivation, and in distribution of scarce resources
domestically and world-wide.
The main economic questions of the international trade theory Efficiency in allocation - what goods are traded
internationally and what are the fundamental laws that govern the international allocation of resources and the flow of trade? - How international trade contributes to rational utilisation of resources world-wide?
Efficiency in motivation - at what prices are the goods and services exchanged, or what are the terms of trade? - How international trade is related to the efficient use of scarce resources?
Efficiency in distribution - what are the gains from trade and where do they come from? How are these gains divided among the trading countries? - What is the impact of international trade in equitable distribution world-wide?
Why do nations trade?
The mercantilist answer: Gold (money) is the immanent form of
wealth The amount of gold is fixed in the short
run More gold can be earned through
exports Protectionist policies contribute to the
growth of the national economy
Why do nations trade?
Adam Smith’s answer: Specialization raises labor
productivity A higher productivity creates an
absolute advantage in production and trade
Free trade makes both parties better-off
Why do nations (people exchange)?
David Ricardo’s answer: Specialization is based not on
absolute but on relative productivity
Exchange is based on comparative advantages
Comparative Advantage – an Example Robinson can catch 12 birds or 5 fish per day. Friday can catch 16 birds or 10 fish per day Robinson’s opportunity costs of catching 5 fish
are 12 birds; the opportunity cost of catching 1 fish is 12/5 = 2,4 birds
Friday’s opportunity costs of catching 10 fish are 16 birds; the opportunity cost of catching 1 fish is 16/10 = 1,6 birds.
Friday has a lower opportunity cost in fishing. Friday has a comparative advantage in
fishing.
Comparative Advantage Robinson’s opportunity costs of catching
12 birds are 5 fish; the opportunity cost of catching 1 bird is 5/12 = 0,42 fish
Friday’s opportunity costs of catching 16 birds are 10 fish; the opportunity cost of catching 1 bird is 10/16 = 0,62 fish.
Robinson has a lower opportunity cost in hunting.
Robinson has a comparative advantage in hunting.
Absolute and Comparative Advantage
Having an absolute advantage – being able to do something with less resources than someone else
Having a comparative advantage – being able to do something at a lower opportunity cost
Why do nations (people exchange)?
David Ricardo’s answer: Specialization is based on relative
productivity Comparative advantages in
production and trade expand production possibilities of both parties and make them better of
Arbitrage tends to equalize prices in the world economy
Gains from trade are enjoyed under the conditions of free trade
Arbitrage and speculation
P
Q
Oz widget market
D
SPOz
QOz
P
Q
Zo widget market
D
S
PZo
QZo
Demand shifts to Zo marketSupply shifts to Oz market
Shifts in Supply and Demand until price differences are eliminated
exports
imports
The Gains from trade
Oz widget market P
Q
D
S
Po= 4
a
b
No trade: Oz price = 4; Q = 30consumer surplus = a
producer surplus = b
Qo = 30
Pw = 2
4a
c
de
Trade: world price = 2; Qo= 16, Q imports = 28, Q = 44Consumer surplus = a+d+eProducer surplus = c
}
Imports = 28
Qo =16 Q = 44
Local consumer's extra gains = d+eLocal producer’sextra gains = -d
The Gains from trade
Zo widget marketP
Q
D
S
Pz = 1.5
Qz = 60
No trade: P = 1.5; Q = 60Consumer surplus = fProducer surplus = g
f
gD
S
P = 2
}
Exports = 28
7850
h
i j
Trade: P = 2; Q = 78Consumer surplus = h = f – iProducer surplus = g + i + j
g
Zo consumer’s extra gain = -iProducer’s extra gains = i + j
1.5
The Gains from tradeOz consumers
Oz producers
Zo consumers
Zo producers
Surplus before trade
a c + d h + i g
Surplus after trade
d + e + a
c h g + i + j
Total: + e + j
Why do nations trade?The factor endowment model – Heckscher-
Ohlin theory Differences in relative factor endowments of
nations Differences in relative price levels Differences in the pattern of factor intensities Product prices equalize in both trading parties
and they both gain from trade Different effects on different groups engaged
in factor abundant and factor intensive industries
International Trade and International Investment
International Good Movementsvs.International Factor MovementsIntraindustry Trade - Stefan Linder
‘s theory – greater trade between the nations with similar levels of income