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Historical development of trade theory

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					Historical development of
trade theory
   Mercantilism
    positive trade balance
    

 Absolute advantage (Adam Smith)
   Countries benefit from exporting what
    they make cheaper than anyone else
 Comparative advantage (David
  Ricardo)
   Nations can gain from specialization,
    even if they lack an absolute advantage
Absolute & Comparative Advantage
 Absolute advantage: each nation is more efficient in
 producing one good
                     Output per labor hour
 Nation              Wine        Cloth
 United States        5 bottles 20 yards
 United Kingdom       15 bottles 8 yards

 Comparative advantage: the US has an absolute
 advantage in both goods, but UK has comparative
 advantage in …
                     Output/labor hour Oppty Cost
 Nation              Wine        Cloth   of Wine
 United States        40 bottles 40 yards 1 yd/bottle
 United Kingdom       20 bottles 10 yards ½ yd/bottle
 Marginal Rate of
 Transformation
        70
        60
             A
        50
        40                           Slope = MRT = 0.5
Wheat




                           B
        30
        20
        10
                                             C
        0
             0   20   40   60   80   100 120 140
                           Autos
Comparative advantage

Transformation schedules:
constant opportunity costs
             United States                            Canada

         160                                160       Slope = 2.0bu/car = MRT
         140                                140
         120                                120
         100                                100



                                    Wheat
 Wheat




          80 Slope=0.5 bu/car=MRT            80
          60                                 60
          40                                 40
          20                                 20
           0                                  0
             0   40     80    120                 0     40     80   120
                    Autos                                 Autos
Comparative advantage

Trading under constant opportunity
costs (terms of trade = 1:1)
               United States                                              Canada
                                                                        B’    Trading
                                                              160
         160                Trading                                           possibilities line
                                                              140
         140                possibilities line                                (terms of trade 1:1)
                                                              120
         120                (terms of trade 1:1)
                   E                                          100   D’          C’



                                                      Wheat
         100
 Wheat




                                                               80
          80
                             C
                                                               60        A’
          60                                                   40
          40
                       A
                                                               20
          20                          F                         0
           0                 D             B                        0   20 40 60 80 10 12 14 16
                                                                                     0 0 0 0
               0       40        80       120   160
                             Autos                                            Autos
Consumption gains from trade:
constant opportunity costs
            Before            After          Net Gain
         Specialization   Specialization      (Loss)
         Autos Wheat      Autos Wheat      Autos Wheat
US        40      40       60      60       20    20
Canada    40      80       60     100       20    20
World     80      120      120    160       40    40
Changing comparative
advantage
          United States                                    Japan


        100
                                                  80




                                          Autos
Autos




                           MRT = 0.67
                                                                MRT = 0.5


                                                            MRT = 2.0
                  MRT = 1.0
         0                                        0
              0       50      100   150                0   40   80 120 160
                     Computers                              Computers
Increasing opportunity costs

Trading under increasing costs:
US
            25            Trading possibilities line

            20

            15
    Wheat




                                          tUS (1A = 0.33W)
            10

            5                               tt (1A =1W)
            0
                 0   5   10    15    20     25   30   35     40
                                    Autos
Increasing opportunity costs

Trading under increasing costs:
Canada
            25            Trading possibilities line

            20
                               tC (1A = 3W)
            15
    Wheat




            10           B’

            5
                                      C’
                         D’ A’              tt (1A =1W)
            0
                 0   5   10    15    20     25   30    35   40
                                    Autos

				
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