The Principle of Absolute Advantage by auu87272

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									       International Trade Models

• Mercantilism;
• The Classical Theories:
  – The Principle of Absolute Advantage
  – The Principle of Comparative Advantage
• The Heckscher-Ohlin-Samuelson Model;
• Alternative Trade Theories
                          Mercantilism

A school of thought dominant before the
19th century, which advocated restrictive
trade policies, so as to maximize exports
and minimize imports for the sake of
accumulating gold and foreign exchange
         The Principle of Absolute
                       Advantage

“If a foreign country can supply us with a
commodity cheaper than we ourselves can
make it, better buy it of them with some part
of the product of our own industry, employed
in a way in which we have some advantage”
            Wealth of Nations, Adam Smith
      The Principle of Comparative
                         Advantage

“A nation, like a person, gains from trade by
exporting the goods or services in which it has its
greatest comparative advantage in productivity
and importing those in which it has the least
comparative advantage.”
                                    David Ricardo
        The Law of Comparative
                     Advantage

Mutually beneficial trade is possible
whenever relative prices (opportunity
costs) between two goods differ in
two countries.
                The Gains From Trade

  A nation’s gains from   The fact that a nation
  trade consists of two   unequivocally gains
  components:             from international
• the gain from the       trade does not mean
  reallocation of         that all groups within
  consumption; and        the nation necessarily
• the gain from           gain: in fact some
  specialization in       groups will lose.
  production.
                             Who Gains?

• Producers and workers in the export industry
  gain as a result of higher world prices and a
  larger volume of trade;
• Consumers of the import competing good gain
  as a result of lower world prices and a larger
  supply; and
• Firms which use imported components and
  materials in their production process gain as a
  result of lower import prices.
                              Who Loses?

• Producers and workers in the import-
  competing industry lose due to increased
  competition from imports;
• Consumers of the export good lose due to the
  smaller supply available to the local market
  and higher world prices; and
• Firms which use exportable components and
  materials in their production process lose due
  to increased prices.

								
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